ABS's Fearlessness Pays Off

By Terence O'Hara
Monday, November 21, 2005

When Baltimore-based ABS Capital Partners invested in Sterling's NeuStar Inc. in 2001, it didn't even announce the deal.

Maybe it was fear of derision. At the time, investors were in full retreat from the telecommunications services sector. Coughing up expansion capital for a company that maintained phone-number registries for telecom carriers wasn't exactly in fashion.

Four years later, NeuStar has turned out to be one of the most successful local private equity investments in recent years. ABS invested about $15 million in the company, according to my calculations. When NeuStar went public in June, ABS sold $36 million worth of stock.

And last week NeuStar registered to sell 1 million more ABS-owned shares in a secondary offering that at the stock's current price will add $30 million to ABS's coffers. So that $15 million investment will have resulted in a cash return of about $66 million, more than four times ABS's initial investment in four years.

And ABS will still own 725,000 shares after the secondary offering.

Also last week, ABS laid the ground for another investment exit when Liquidity Services Inc ., a District-based online seller of surplus inventory, registered to go public, hoping to raise up to $86.3 million. ABS is the only private equity investor in Liquidity Services. It bought about 3.3 million shares in a recapitalization of the company in September 2004, for $20 million. The registration statement filed by Liquidity doesn't assign a value to the company, but if Liquidity goes public at $9 a share, for example, ABS's stake would be worth $29.7 million. Securities and Exchange Commission documents do not disclose how many, if any, shares ABS will sell in the IPO. [Related article, this page.]

ABS officials would not comment on either the NeuStar or Liquidity investments, or on returns from any of its investments. But general partner Phillip A. Clough agreed to speak generally about the firm's strategy.

Clough said ABS "is in the business of identifying the next new thing" or, more precisely, what next new thing is going to catch fire in the equity markets. While ABS invests in traditional venture-financed businesses -- telecommunications, software, health care, business services, online media -- it doesn't provide early funding like traditional venture firms. ABS invests in companies after they have gone through at least one venture funding, but aren't yet big enough to consider public stock offerings or a purchase by another company.

"We're not early-stage investors," Clough said. "By the time we come in the company has already gotten past the technology risk. So our companies are in an expansion stage. They've already got the business model right, the management right and the strategy right. We provide the capital to get them to the next level."

ABS's investing includes a range of deals, from whole-company buyouts to minority-stake equity financings. Its typical investment ranges from $10 million to $40 million, and most of its companies have annual revenue of $20 million to $100 million.

About a third of ABS's most recent fund, $450 million raised in 2000, is invested in the mid-Atlantic region, Clough said. Other local investments, past and present, include Cyveillance Inc. of Arlington, Dulles-based modular office provider Resun Leasing Inc. , District-based InPhonic Inc. and OTG Software Inc. of Rockville. Most of its investments, though, are in New England or California.

The "next new thing" strategy that Clough talks about mirrors closely the approach that was employed by the venerated, now-defunct investment banking house Alex. Brown & Sons , the Baltimore firm that in the 1980s and 1990s was a major backer of growth companies and in its day was the biggest underwriter of initial stock offerings. That's natural: Most of ABS's 22 partners and employees are refugees from Alex. Brown, which is now part of Deutsche Bank. And ABS, which stands for the old firm's name, was started as the merchant banking division of Alex. Brown. It was spun out of the company in 1995. It was led then, and now, by Donald B. Hebb Jr. , the former chief executive of Alex. Brown.


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