'Below the Radar': Marshall Geller's St. Cloud Capital finances companies that Wall Street won't touch. The rewards have been remarkable.

After Marshall Geller spent 20 years working for Bear Steams & Co., he came to the conclusion that Main Street, not Wall Street, is where the real action is for small high-growth companies. So in 2001, Geller founded St. Cloud Capital, a mezzanine lender that uses a combination of debt and equity to fund small public and private firms. He is currently a director of six public companies including three based in Los Angeles: SCPIE Holdings Inc.. an insurance firm that recently won a tough proxy battle; 1st Century Bank, a bank startup; and Blue Holdings Inc., the high-flying jeans company founded by Paul Guez. Geller has learned plenty of tricks in his 40-year-career. As senior managing director at Bear Steams, he helped grow the firm's offices in Los Angeles, San Francisco, Chicago, Hong Kong and the Far East. He also founded his own merchant bank, and began his career operating an export-import and licensing business in Japan.

Question: How'd you get into your current business?

Answer: I had a friend who had an import company and he needed $5,000. I was about 22 years old. A new bank had opened up on Sunset Boulevard called Hollywood State Bank. And I'll never forget it because it set the tone for what I think now. The banker asked me a bunch of questions--was I married, did I have any children, did my parents live here. When I replied yes to all of his questions, he told me he would lend me the $5,000. I was stunned. And he said, "You live in this town, you have a baby and your mother and father live here. There's no way you're not going to pay us back." It was something that stuck in my mind. Anyway, I went into this import-export business with my friend and I ended up traveling a lot to the Far East.

Q: You spent 20 years at the brokerage and investment banking firm Bear Stearns. What can you tell me about that experience?

A: Sometimes you can be very lucky, and I was. When I joined Bear Steams, it employed just 200 people. I ended up running most of the offices outside of New York--Los Angeles, Chicago, San Francisco, Hong Kong and Japan. I really began to see a lot of things that started falling below the radar screen of Wall Street. This is an interesting concept that more people are starting to understand.

Q: What kind of things were "below the radar"?

A: Let's face it, if you're not doing a half-billion-dollar deal on Wall Street, the fees don't pay for a firm's infrastructure. A lot of deals started coming in but Bear Steams couldn't do the deals because they were just too small. Chuck Schwab came in and wanted us to do his underwriting. Mario Gabelli (of Gabelli Asset Management Co.) was just starting off and we couldn't work with him. So, while I was in the game at Bear, you get to a certain point in your life when you say, there's a lot of other things to do. I prospered beyond my wildest dreams.

Q: When you left Bear Stearns, you saw a way to fund small businesses?

A: First, I started a merchant bank. Then, in 2000, someone approached me about starting an SBIC, a small business investment company through the Small Business Administration. It's one of the few agencies of the federal government that is profitable. SBIC was the original money in Federal Express, in Microsoft and in a whole lot of other major companies. Basically, it's a very interesting concept. For every $1 in equity that you put up, the government will put up $2.50 at a very low interest rate. So far, St. Cloud Capital has financed 27 companies with growth capital. There are more than 140,000 companies on the radar screen of what I do, which is a huge number.

Q: Do you do more private or public companies?

A: We do privates and publics, and we try to keep it balanced. I happen to like the public stuff because of my background in the public world. There are so many public companies that are orphans and they're just languishing. They're like pretty girls who can't get a date. The SBIC is a vehicle for this particular world we're talking about. We have so many investors who want to do side-by-side with us. I can make five phone calls and get people to invest with us on anything. And the money is coming in from people who have the ability to understand the market.

Q: Why do these companies, especially if they're public, end up needing help?

A: Many public companies can't go to Wall Street to raise capital, so whom do they go to? I've been in this business for 40 years, so a lot of people end up calling me because they usually have an issue, or some problem, and we can fix it. We have huge deal flow, tremendous deal flow. I've always had deal flow. So the issue is converting this deal flow into making money.

Q: What kind of companies do you fund?

A: We have a staff of about 10 professionals and the only companies we don't fund are high-tech. One of our companies, Computer Motion Inc., was a robotic surgery company that was losing money and also was locked in a legal battle with its competitor. They had received 12 rounds of financing before they came to us asking for $12 million. We put the deal together and three months later they merged with their competitor, Intuitive Surgical Inc. The stock traded initially at $4 a share and now trades at $95 a share. This was a company that couldn't get 10 cents of funding on Wall Street. Another company we funded is CinnaWorks LLC, which owned the Cinnabon stores and was being sold by its parent company in late 2004. We bought it at a good price with a good management team, and now it's a home run. They have these hand-held cinnamon buns on a stick that mothers feed to their children in malls, and that is just exploding.

Q: So you're basically financing companies that can't get funding elsewhere?

A: We get companies all the time coming in and asking if we'd be interested in financing a small management-led buyout. Here's a perfect example. A company has a market cap of $50 million and they want to go private. Who are they going to go to? A Wall Street firm won't take them. That's going on a lot. With Sarbanes-Oxley, the cost of a lawyer and CPA, they probably could lop off $3 million to $5 million a year in expenses. And, the companies that are public have no analyst coverage. We're a mezzanine fund so we put money in companies that have cash flow, they have assets, we believe there is equity value. Every fund has its own niche. Some won't touch companies that are too small. We really are, in many cases, helping the company turn around or do something creative to get more value for their shareholders or owners.

Q: Are you in partnership with these companies?

A: There's a guy who came to us and ran the largest fencing company for 28 years. He had an opportunity to buy the second-largest fencing company. We helped him put the deal together. We own 60 percent because we put up the money. He put in some money and the sweat equity. And we gave him the right to claw back and own the majority. It's a classic deal and he couldn't go anywhere else to get the deal done. Many of these companies aren't glamorous, they just have to be really well run, with good management and make money. We'll get our debt paid with a nice interest rate and we'll make money on our equity.

Q: How do you see your role as a partner?

A: We are not venture capitalists. We understand that in small companies that there are always little glitches. A company may miss their numbers or be in violation of a debt covenant. They can negotiate with us because we understand. A deal has to be good for both sides. We like to believe we're tough, and we are, but at the same time, you'd better have a good relationship with the people you're putting money into a business with, because the minute it turns sour, there are problems.

Q: Tell me how you got your first job.

A: Somebody told me when I was very young that the best business was the one where they gave you a desk and a phone. My nickname on Wall Street was "Geller the Seller." (Laughs) I went to work for Merrill Lynch. After six months I walked out. I said: I can't work in this atmosphere. In those days, you got an order and you put it on a conveyor belt and the conveyor belt went into another room, never to be heard from again.

Q: How did you end up at Bear Stearns?

A: I had a very close friend who was in the brokerage business and he convinced me to join him. We flew to New York and met Alan Greenberg, (chairman of the executive committee of Bear Steams and one of the shrewdest players on Wall Street). Greenberg took me aside and told me he liked hiring what he called PSDs--people who are poor, smart and with a deep desire to get rich. I give the commencement address at Cal State Los Angeles and I always tell them the story of PSDs.

MARSHALL GELLER

Title: Founder, Senior Managing Director

Company: St. Cloud Capital LLC

Born: 1939, Los Angeles

Education: California State University, Los Angeles 

Career Turning Point: Returning to Bear Stearns & Co. for the second time as a partner with coverage of Japan, Hong Kong and the Far East

Most Admired Person: Alan "Ace" Greenberg

Personal: Married, two grown daughters

Hobbies: Fly fishing at the Lodge at Palisades Creek, in Irwin, Idaho. The site has nine rustic cabins and he owns it.

By KATE BERRY

Staff Reporter