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Tuesday, June 26, 2001

Undiscovered Finds Private Equity

Reported by Sean Hanna, Editor in Chief

Undiscovered Managers has raised a third round of capital in a bid to build out its product line and bolster its marketing efforts. The Dallas-based firm relies on subadvisors to manage about $430 million in sub-advised mutual funds and separate accounts. Its focus is on marketing and product development. These efforts will include the addition of private equity, hedge fund and real estate products to its lineup.

Undiscovered Managers will also slowly add to its staffing levels. "We are not a dot com, so you are not going to see us add a hundred employees," joked Mark Hurley, president and chief executive of the firm. He said that firm executives are now looking at adding a "couple" positions, including a director of operations. It is also exploring adding some product development people and "maybe one marketer."

Hurley said that the firm raised nearly $8 million in private equity from Seattle-based Orca Bay Partners LLC, which will own a 16 percent stake. He added that the proportion of the firm held by management will climb to 60 percent from 54 percent prior to the deal. Altogether the firm has raised roughly $20 million in capital.

The current environment made it an "interesting time to raise capital," said Hurley. He added that he hopes this will be the firm's last round of private equity and that the firm is "close to becoming self-financing." "It is a fairly distracting activity to raise money," he added.

The transaction was revealed when Undiscovered Managers filed a notice of a special shareholders meeting with the SEC. The meeting will be held July 20.

Shareholders must approve the changes as the investment by Orca Bay constitutes a change in control under the Forty Act. Dallas-based Amresco Commercial Finance had owned 36.25% of the firm as of May 31. Although it is purchasing shares as a part of this latest round of funding, its stake will be diluted to less than the 25 percent of the firm thereby causing a change in control. Orca Bay while own a 16 percent stake in the fund firm when the deal is completed.

Orca Bay will also control three members of Undiscovered's seven-member management committee which had previously been controlled by Amresco. Hurley's brother, John Hurley, and Lawrence Bowman also invested in the round as angels. John Hurley had been a colleague of Bowman's in Bowman Capital Management until last month.

Hurley said Orca Bay was chosen from among a few interested investors because it is a specialist in investing in financial services companies. "Their principals have a real understanding of the business," explained Hurley. "We looked at several parties and wanted someone who understood the business and could bring something to the table beyond capital." Related Stories
  • Undiscovered Managers Plans New Fund, 03-26-2001
  • Un(discovering) Absolute Returns, 03-23-2001
  • Undiscovered Managers to Sponsor First Wealth Management Symposium, 03-17-1999  

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