Internet firms are all the rage, but venture-capital company Riordan, Lewis & Haden wouldn’t touch a dot-com with a 10-foot pole.
“They don’t have proven profitable models,” says Murray Rudin, who heads the firm’s Irvine office.
In fact, RLH isn’t necessarily interested in technology companies. Most of its portfolio investments,including four Orange County firms,are service-related companies.
If that approach to investing doesn’t make RLH stand out in the VC crowd, its name partners do, as they include the mayor of Los Angeles and a USC football hero.
RLH invests in high-growth firms with revenue in the range of $25 million to $500 million. It looks for firms that have the capability of growing in several different ways, either geographically, through acquisitions or with new product or service offerings.
While Internet startups have been successful in attracting venture capital, they’re losing money, Rudin said, and that can’t go on forever. “At some point investors are going to say, ‘Enough is enough.’ ”
The market is being driven by greed in a rash of “momentum investing” when it used to demand earnings growth, he said. Sure, the fast-money carrot presented by the dot-coms is tempting, Rudin concedes, but RLH intends to stick with its long-term investment model. “We’re here to build businesses. That’s what pays off.”
RLH investors are comfortable with its investment philosophy and have committed to the model, Rudin said. “That was our pitch to them and they expect us to do that.”
RLH typically invests $5 million to $15 million in a company and has in excess of $150 million to invest. Its target return on investment for its backers is 30% or more compounded over a 15-year period.
RLH’s Richard Riordan,that’s Los Angeles Mayor Richard Riordan,used to be the biggest investor. However RLH recently received its first set of institutional capital: $120 million from bank and insurance companies. Riordan,now an inactive partner,started the group in 1979 with his personal assets. Today his assets are still invested, but they are in a blind trust to avoid any conflicts of interest with his mayoral duties, Rudin said.
In addition to the mayor, RLH has a partner who made his name as a football player. Pat Haden, the former USC and Los Angeles Rams quarterback, joined RLH in 1987. Haden is the public face of the company and recently spoke at the Orange County Forum on Internet valuations.
Haden’s never been just an athlete. While at USC, he was awarded a Rhodes Scholarship to study philosophy, politics and economics at Oxford University in England. He also attended law school at night during the Rams’ seasons. Rudin describes Haden as a smart guy who happens to be a good athlete.
Then there is Chris Lewis, who is not a football player or a mayor but has been with RLH for 19 years. He has sealed many of the deals and is a board member of five public companies and four privately held firms. Both Haden and Lewis are based in Los Angeles.
Rudin, who joined the firm in 1998, is the newest partner. Rudin is a former CFO and director of business development for a publicly traded medical imaging firm. He also was a principal in Valley National Investors Inc., a Phoenix-based venture-capital fund.
Rudin set up the firm’s OC office to be close to its local investments.
OC is also a great location in terms of new deal flow, Rudin said. Though OC is more famous for its dot-coms, it is a hub for profitable middle-market companies, he said.
“Orange County is a very vibrant economy; full of companies that meet our investing criteria,” he said.
In fact, Rudin said, OC may even be a better market than its Silicon Valley and Los Angeles counterparts.
“Los Angeles certainly has more business in the aggregate, but it doesn’t quite have the entrepreneurial culture Orange County has.”
Silicon Valley, on the other hand, is entrepreneurial but loaded with dot-coms, unappealing to RLH, he said.
OC Investments
Over the past decade, RLH has invested about $5 million each in four OC firms. Its most successful deal was an investment in Irvine-based Data Processing Resources Corp. The company, founded by Mary Ellen Weaver, grew its revenue from $35 million to $350 million in five years and was acquired by Compuware in August.
“It was a big win,” Rudin said.
For 10 years, RLH had a stake in Irvine-based PIA Merchandising, a retail services company in Irvine. However, PIA recently merged with SPAR Group so RLH’s involvement in the company is winding down.
One of its more recent investments is in an assisted-living facility, based in Aliso Viejo. RLH invested in the privately owned Silverado Senior Living in 1997. The facility, which specializes in care of Alzheimer’s patients, offers a much-needed service and is steadily growing, Rudin said.
Rounding out its OC portfolio is Newport Beach-based SM & A; Corp., a consulting and proposal management company. RLH invested in SM & A; in 1996.
“They’ve grown substantially,” he said.
The company was recently awarded a five-year subcontract with a potential value of $6.75 million from Science Systems and Applications Inc. of Lanham, Md.
SM & A; is an example of a growth company with a soft stock price, $5 per share. But since RLH is a long-term investor, it can weather the ups and downs of the public market, Rudin said.
Meanwhile, RLH has invested in some companies that haven’t grown to potential. “Building business is not an easy task,” Rudin said. If a deal isn’t going well, it generally means the company is growing slowly. “We don’t have ugly crash-and-burns.” n
