Harbert Outperforming Falcone With 11% Return Suffers Asset Drop

Raymond Harbert, chief executive officer of Birmingham, Alabama-based Harbert Corporation, had a radical proposal for his father. It was 1992, and the company that had made his dad, John M. Harbert III, a billionaire was eking out small profits and was $300 million in debt. Raymond proposed selling the core construction business, which dated back to the company’s 1946 founding. The elder Harbert threw his son out of his office, an associate recalls.

Raymond, then 33, eventually persuaded his father to sell. Once the debt was extinguished, he presented his father with another big idea: shifting the family business into finance. John Harbert not only gave his approval this time, he loaned his son $3 million against his inheritance to launch the investment firm, Harbert Management Corp. Father, son and four lieutenants celebrated by draining a bottle of Sheep Dip scotch, a whisky that bills itself as “rich, warming, malty, young and sprightly,” Bloomberg Markets reports in its June issue.

John Harbert died three weeks after that 1995 celebration and so didn’t live to see the results. Harbert Management funds averaged an aggregate 11 percent return for the 16 years ended on Dec. 31, 2010, compared with 6.1 percent for the Standard & Poor’s 500 Index, according to data supplied by the firm to investors. Harbert’s U.S. and European real estate funds enjoyed combined returns of 17 percent in 2011, according to the firm’s annual report.

Photographer: Brent Humphrey's/ Bloomberg Markets via Bloomberg.

Raymond Harbert, Chief Executive Office of Harbert Corp. left with Michael Luce, Harbert President together after a day of Turkey Hunting near Birmingham, Alabama, Jan 6, 2012. Close

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Photographer: Brent Humphrey's/ Bloomberg Markets via Bloomberg.

Raymond Harbert, Chief Executive Office of Harbert Corp. left with Michael Luce, Harbert President together after a day of Turkey Hunting near Birmingham, Alabama, Jan 6, 2012.

Harbinger Capital

And Raymond’s first crack at launching a hedge fund produced Harbinger Capital Partners -- the firm run by Philip Falcone, who in 2001 took seed capital of $25 million and by mid-2008 had turned it into $26 billion of assets.

Harbert and Falcone parted ways in April 2009, when Falcone bought a controlling stake in Harbinger for an undisclosed sum. The Alabamian remains an investor in Harbinger’s flagship fund, whose main investment is in a company called LightSquared Inc. The high-speed wireless Internet company filed for Chapter 11 bankruptcy on May 14 after U.S. officials concluded its proposed service would interfere with the global-positioning system.

Last year, that primary fund lost 47 percent, according to investors, and as of April 5 Falcone said he was managing just $4 billion.

To Harbert’s frustration, his assets under management have also dropped, to $3.1 billion in mid-April from as much as $29 billion in 2008, despite stellar returns. The firm manages money in 10 asset classes, including hedge funds, private equity and venture capital, with much of its money invested in property.

$500 Million Invested

Harbert, who had $500 million of his own money tied up in the firm at the end of March, according to data compiled by Bloomberg, says he’s been unable to attract more money because institutional investors, chastened by the 2008 meltdown, are shunning smaller shops in favor of big, name-brand firms.

About two-thirds of the money flowing into hedge funds since 2009 has gone to firms with $5 billion or more in assets, according to Chicago-based Hedge Fund Research Inc.

“You’re not going to get fired for investing with a big New York shop,” Harbert says. Even if you lose money, he says, investors prefer that a fund’s performance tracks its peers: “They’re not paid to take risks; they’re judged by how their fund does on a relative basis.”

The clients Harbert does attract are investing in a firm with considerable financial sophistication and global reach. The company has offices in London, Madrid and Paris and runs a private-equity fund in Melbourne. Some of Harbert’s most successful investments have been in France and in the U.K., where he bought commercial real estate at post-financial-crash discounts in 2009 and flipped it for quick profits in 2010.

Quail Shooting

For example, he put $39.9 million of equity into five retail and food warehouses north of London in June 2009 and sold them for $72 million in November 2010.

Harbert offers clients one perquisite they can’t get in New York. He takes them turkey and quail shooting on his 10,000-acre (4,050-hectare) south Alabama plantation. He also can get the best seats in the house at Auburn University football games. The Alabama school, the alma mater of both Raymond and his father, won the NCAA Division 1 football championship for the 2010-2011 season. Raymond has made major donations to the university, including a $5 million gift in 2007.

Harbert, now 53, isn’t a drawling tycoon in the style of family friend T. Boone Pickens, the Oklahoma oilman. Harbert rarely sits for interviews, though he says he was bombarded with requests during the Harbinger years. He has spent much of his life wearing a professorial beard, maintaining a low profile in Birmingham and neutralizing his Southern accent.

Shaves Beard

“When you’re from Birmingham, you have to work harder to convince someone in another part of the world they should invest with you,” says Harbert, who shaves the beard off before hitting the road to raise money for new investment funds.

Harbert’s anonymity stands in sharp contrast to the celebrity of his protege Falcone, who with his wife, Lisa Maria, has become a figure on the New York social and philanthropy scene. Falcone’s fund made $11 billion in 2007 betting on the imminent collapse of subprime mortgages.

Harbert and Falcone were an odd couple during the eight years in which Harbert Management was Harbinger Capital’s parent. Falcone, the son of a Minnesota utility worker, became a Harvard University hockey player, contributed millions to charity and bought Penthouse founder Bob Guccione’s 27-room Manhattan mansion for $49 million after his big hedge-fund coup.

Hunting and Cooking

Harbert, who was born into money, didn’t change his lifestyle after Harbinger took off. He lives in a 5,300-square- foot (490-square-meter) home in Mountain Brook, a Birmingham suburb, and his idea of a big weekend is bird-dogging on his hunting reserve or staying home to cook Italian dishes for his wife and college sweetheart, Kathryn.

People familiar with the Harbert-Falcone relationship say it became strained as it wound down and ended in the spring of 2009. Yet, Harbert has nothing bad to say about “Philip,” as he calls Falcone.

“I’d say 85 to 90 percent of the Harbinger experience was positive,” Harbert says.

Harbert says he admired Falcone’s command of detail in picking which subprime-backed securities to bet against.

“From 2001 to 2005, it was fantastic,” he says.

Falcone declined to comment for this story.

‘Winning the Lottery’

For better or worse, Falcone’s rise put Harbert Management on the map. “It was like winning the lottery on the way up, and it was, if not a black eye, at least a poke in the eye on the way down,” says John Casey, chairman of Casey, Quirk & Associates, a management consulting firm that has advised Harbert Management on how to market its funds.

Michael Luce, Harbert president and a former Bear Stearns & Cos. managing director, says Falcone’s success brought Wall Street to his door.

“When Harbinger was hot, money was flowing in here like you can’t imagine,” Luce says. “There were wire transfers where we had a tough time figuring out who was sending the money.”

That Harbert is now swimming against the current is clear from the history of his Value Fund, a long-short hedge fund. Its returns have averaged 14.8 percent during the past three years, according to Bloomberg data. Yet, it had only $235 million of assets in mid-April. Meanwhile, Harbert’s new U.S. Real Estate Fund IV, which aimed to raise $250 million, closed to new investors in September with a total of $134.2 million. As of mid-May, Harbert had yet to attract investors to new distressed- debt and commodities hedge funds.

‘Quite Brilliant’

As a result, Harbert has trimmed its workforce. The firm had 75 employees in its back office when its assets peaked in 2008; it had 55 in mid-April.

“Raymond’s performance has been quite brilliant,” says Alan “Ace” Greenberg, the former chairman of Bear Stearns. “Money managers have gravitated to the big guys, who they see as safer.”

Greenberg, 84, was a friend of Harbert’s father and helped pitch the nascent firm to its first potential investors at the Keeneland Thoroughbred racehorse auction center in Lexington, Kentucky, in 1994.

On the advice of consultant Casey, the firm is trying to raise its profile. Harbert has shifted original partner Charlie Miller from chief financial officer to head of distribution, where he is leading the push to increase assets. He hired two new marketing executives in New York last year.

Merchant Banking

Even as he seeks outside investment, Harbert remains committed to what he calls the merchant-banking model, in which he depends for profits on savvy investments rather than fees from clients.

To keep the firm’s interests aligned with those of investors, he makes sure he and his 16 partners have skin in the game. They own about a quarter of the assets under management in each Harbert fund.

“The Rothschilds charged some fees, but they made their big money out of putting their own money to work,” Harbert says. “I wanted to start a fund that looked like a merchant bank, and that’s what I still want.”

Until he broke away from the family construction business, Harbert spent his career in the shadow of his father, one of the South’s most powerful businessmen. A 36-story office building erected by the senior Harbert and sold in 2008 is downtown Birmingham’s second-tallest structure, towering over his son’s 11-story office three blocks away.

Craps Winnings

Raymond says his father, who fought in World War II, parlayed $6,000 of war bonds and troopship craps winnings into a construction business that rode the growth of postwar America by building major highways, airports and shopping malls, first in the South and then nationally.

John Harbert later branched out into coal mining, a business he sold to the Standard Oil (SOCU) Co. in 1981 for $400 million of stock. He became Alabama’s richest man and, upon his death, his widow, Marguerite, now 87, became its richest woman, according to Bloomberg data.

“He was charming as all get-out,” says Casey, who recalls John Harbert holding court at the Keeneland investor presentation, during which Bob Dole, then the U.S. Senate minority leader, came by to pay his respects to this major Republican donor.

“He could be pretty brash,” says Pickens, who first met John while raising money for Pickens’s failed Gulf Oil takeover attempt in 1983. When Pickens told Harbert he would have to check his schedule before committing to making a speech in Birmingham, Harbert said sternly, “I want you to be here,” Pickens recalls.

Leveraged Buyout

Raymond says his father wanted him to get an engineering degree and eventually take over the construction business. He wasn’t pleased when his son instead chose to major in business at Auburn. After joining the family firm in 1982, Raymond managed Harbert Corp.’s real estate portfolio and, in 1989, led an attempt at a $500 million leveraged buyout of Birmingham Steel Corp. That deal collapsed in February 1990, after financing for such transactions dried up.

Harbert Management got off to a slow start, and the founder decided he needed help. “I had the entrepreneurial spirit but also a lot of naivete and ignorance,” Harbert says. He courted Bear Stearns’s Luce, who had worked with him on the attempted Birmingham Steel buyout, inviting him to do some wild turkey hunting.

As they relaxed after a day in the fields, Harbert popped the question: Would Luce become his No. 2?

Luce says he agonized for months before accepting. The reaction of his Bear Stearns colleagues was unanimous: “They thought I was nuts.”

Hard Work

What Harbert lacked in experience, he made up for in hard work, say current and former colleagues. Harbert scouted prospective investments for his first European real estate fund by riding around Sweden in the back of a van, looking at properties. Scott O’Donnell, a fellow passenger then working for Bankers Trust Co., was so impressed by the Alabamian’s diligence that he joined Harbert Management in 2002.

“He cares about making investments, not taking in fees,” says O’Donnell, who is now chief of Harbert’s European real estate operations in London. Like his boss, he is frustrated that it’s so tough to attract outside investors, despite the firm’s earning a 28 percent return on its first European real estate fund and 15 percent on its second as of mid-April.

Harbert himself says he yearns to get his firm back to the $5 billion asset mark.

“But if getting to a bigger size is going to change our style of investing, we won’t go there,” he says.

To contact the reporter on this story: John Helyar in Atlanta at jhelyar@bloomberg.net

To contact the editors responsible for this story: Michael Serrill at mserrill@bloomberg.net; Anita Sharpe at asharpe6@bloomberg.net.

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