Former Wrestler Body Slams Private Equity –

It’s fair to say that Philadelphia is not the most fashionable city in the nation. It is also true that Chestnut Street is not the most fashionable street in Philadelphia. But it is on Chestnut Street in the City of Brotherly Love where you will find Ira Lubert overseeing a very, very chic $2 billion under management.

Lubert’s offices in a converted 19th century hotel are about as far away as you can get from the pretty but sterile confines of Sand Hill Road. Across Chestnut Street are a men’s clothing shop and a deli. Next-door is a typewriter and computer repair business. On the bottom is a furniture store.

Hotel Lubert

Lubert bought the nine-story Belgravia Hotel during a quasi-bankruptcy sale. Its stone façade is both formal and solid, without a hint of slickness. Going up to Lubert’s office on the top floor still feels like going up to a room in an old hotel.

“We could have gone into any of the other office buildings in Center City,” he says, tilting back in a leather chair in his wood-paneled office. “But we needed a building that reflects what we do, and this old hotel speaks to what we are all about.”

What Lubert is all about encompasses a great many things, but a sort of unfashionable, solid investment strategy underpins it all. The 52-year-old and his funds are contrarian yet conservative. He has invested in abandoned furniture stores, retail clothing chains for teenage girls and hospital cleaning services. And he has done very well for himself and his LPs.

Lubert’s dominion spreads out beneath the umbrella of IL Management, a holding company of four funds he helped found: Lubert-Adler Management, a real-estate opportunity fund; LLR Equity Partners, a venture fund focused on mid-to late-stage companies in the mid-Atlantic region; LEM Real Estate Mezzanine Fund; and Quaker BioVentures, which hopes to close on a $300 million debut fund in September.

When others started sinking money into Internet companies in 1998, Lubert resigned from his 11-year job at Safeguard Scientifics Inc., where he managed technology venture funds at the NYSE-listed company. A combination of factors led him to make the jump, among them a commute time that had jumped from 45 minutes to more than two hours. But the main reason Lubert left the security of Safeguard was to make a name for himself outside of the auspices of his good friend and Safeguard founder Warren “Pete” Musser.

Transparency

“You would look at a Safeguard fund prospectus and somewhere down there under invisible ink was the name Ira Lubert,” Lubert says. “I wanted to go out and see if I could raise a fund on my own.”

He turned his back on tech and focused on real estate, buying and selling 68 properties on his own before teaming up with Dean Adler to form a real estate fund. Lubert quickly answered the question of whether he could raise a fund on his own, raising a $120 million fund in 1998 and a $358 million second fund in 1999.

Lubert and Adler now manage $1.3 billion in three real estate funds. The last fund they raised, buyout-focused Lubert-Adler III, was meant to be $300 to $400 million, but the money kept pouring in from pension funds and universities. They finally capped it at $850 million in May. Lubert’s original real-estate fund has already paid back its LPs, and the money that flows from it now is pure profit, which he estimates will add up to about $120 million.

BMOC

Lubert is a big guy, a former wrestler at Penn State and an alternate on the U.S. Olympic team at the Munich games in 1972. He downplays his wrestling (“as an alternate you get to sit in the bleachers with everyone else”), but anyone who has ever wrestled knows the tenacity the sport requires and how much pain must be endured. There is something of the wrestler in everything he does.

Lubert’s strategy in gaining a spot on the Olympic team is similar to the way he looks at investment opportunities. There is no 220-pound weight class in NCAA wrestling, but there is in the Olympics. Lubert figured there would be fewer guys trying out at that weight class so he dropped from 293 pounds to wrestle at 220 pounds and he made the team.

When other VC funds focused on the glamour of the Internet, then optical networking and other moon-shot technologies, Lubert went to another weight class, real estate. Philadelphia has one of the highest concentrations of research hospitals and pharmaceutical companies in the nation, but until Quaker BioVentures, Lubert says, no one had set up a local biotech fund to focus exclusively on the region’s untrammeled investment opportunities.

With LLR Equity Partners, Lubert is taking his $260 million fund and again investing where others aren’t. For starters Philadelphia is a backwater when it comes to VC. The city may have a long history, but it had little to do with private equity until the early ’80s.

LLR Equity Partners is a regional fund, with investments focused on the mid-Atlantic region, ideally no more than a two-hour jaunt from Philadelphia. “We’re not saying that national funds are a bad strategy,” Lubert says. “We’re just saying it’s not our strategy. Right now we are the only fund in this area doing this on a dedicated basis.”

Patient Money

He describes his fund as “very patient money.” He and his partners are not looking to pick the next mind-blowing router or wireless gewgaw. They look for mature companies with mature management, a strong revenue stream and a unit-based business model that can be replicated endlessly. Favorites are companies involved in business services.

“The target market for us is mid-to late-stage companies that can’t go public today and don’t want to be sold tonight,” Lubert says. “They need between $10 and $20 million, and we invest our money in a minority position.”

LLR EP’s portfolio runs the gamut from a hospital services company to a credit card payment processor. In 2000 LLR invested $4 million in the teenage retail chain Weathervane. Some of its LPs (see box, right) bristled at the investment.

“Who wants to invests in retail?” says Howard Ross, one of the four LLR Equity partners, who recalls the LP reaction. “Retail is bad, apparel is worse and teenage girls are the worst. Two LPs called us up and a third put it in writing.”

But LLR stuck to its guns and saw the investment through with great success. “It had a concept that could go from 50 stores to 500,” Ross says. “We saw teenage girls have a lot of disposable income, and the company had a good management team.” In the last two years, Weathervane’s revenues have grown more than 20 percent annually and pre-tax earnings have almost tripled.

Of the 15 investments made by LLR Equity Partners, one company, Crothall Services Group (the hospital services outfit) was acquired, and the equity in another, eResearch Technology, was sold. Two more portfolio companies are teed up for liquidity events, including an IPO of an unnamed business services company. In less than three years, LLR has returned almost half of the capital it has called down, Ross says.

LLR hasn’t always been on the mark. It invested in IT Service provider Omnient, which went out of business. “We invested $1.75 million and lost $2.2 million overall” after covering payroll and other closure costs,” Ross says. “I can remember every penny of it. That’s the way we are.”

Surrounded

Ross, a former Arthur Andersen veteran, built up a venture practice at the accounting firm. He can tell you everything about VC in the Philadelphia region (and everything about the University of Pennsylvania basketball team, if you really want to know). Ross is indicative of the people Lubert has surrounded himself with: bright folks who know everything about the area in which they operate-whether it’s biotech, real estate or the Mid-Atlantic.

At LLR, Ross is the quantitative man, putting together deal terms. Lubert focuses on raising money for the funds, and he manages the back office that supports all four funds under IL Management.

Lubert’s other talent is meeting with portfolio company entrepreneurs and figuring out what they need to succeed. A former top salesman at IBM, Lubert is often brought in to critique sales and marketing efforts at portfolio companies.

Everyone has a role to play, and Lubert plays to everyone’s strengths. “It’s simple,” he says. “If you find the right strategy and combine it with the right world-class people, then capital will find its way to your door.”

“We’ve stuck to the model we have perfected,” he continues. “There are a lot of people doing the other things-there are a lot of early-stage technology investors. We are staying focused to the target, investing in what we think is an underserved market and will continue to be.”

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