Houlihan Lokey to enter fund management with offbeat ESOP-investment partnership.

Financial consulting firm Houlihan Lokey Howard & Zukin will make its first significant foray into fund management by launching a $200 million to $250 million limited partnership by the end of July.

The Century City-based firm describes it as the "largest fund devoted exclusively to providing subordinated debt and equity capital to existing and to-be-formed ESOP companies."

Employee Stock Ownership Plans are programs designed to enable employees to buy shares in the company they work for. All ESOPs assets are required by law to be primarily invested in the stock of the sponsoring company.

Houlihan Lokey intends to help employees acquire minority or majority stakes in the companies they work for and help finance companies that already partly or totally owned by ESOPs.

"We're going to help the employees finance the acquisitions by providing subordinated debt or preferred or common equity," explained John Mavredakis, a managing director at Houlihan Lokey who will co-manage the fund with partner Jim Zukin. "We'll also be investing in existing ESOPs to fund growth and acquisitions."

To accomplish the fund's mission, Houlihan Lokey has teamed up with Churchill Capital Inc., a Minneapolis-based general partner for privately placed limited partnerships. Churchill, ESOP Capital Partners' general partner, will raise money from pension plans, insurance companies, and wealthy families. Houlihan Lokey, the fund's special limited partner and adviser, will find the deals.

The selected companies, said Mavredakis, will range in annual revenue size from $10 million to $200 million. He said he expects about 10 percent of the transactions will involve L.A. County-based firms and, in fact, said he was working on a local deal right now.

Houlihan Lokey began selling its services as an ESOP valuator shortly after the federal government enacted the 1974 Employment Retirement Income Security Act, which brought these plans into being. After almost 20 years of experience with ESOPs.

Zukin, Mavredakis and their team are convinced ESOPs are a good investment to back right now.

For starters, several studies have shown that ESOPs tend to outperform their non-ESOP counterparts.

Researchers from Rutgers University and the University of Baltimore have tracked stock price movements since 1991 for the 355 companies listed on the NYSE, AMEX and NASDAQ that are more than 10 percent owned by ESOPs.

They noted that in 1991 the prices of these stocks were up 35.9 percent vs. gains of 20.3 percent for the Dow Jones Industrial Average, 26.3 percent for the Standard & Poor's 500-stock index and 34.2 percent for the Wilshire 5000 Stock Index. One year later, ESOPs were up 22.9 percent vs. gains of less than 4.5 percent for the first two indices and a 16.4 percent increase for the Wilshire.

And in 1993, the 20.7 percent gain for the ESOPs compared with a 13.72 percent for the DJIA, 7.06 percent for the S&P 500 and 11.28 percent for the Wilshire.

Several other studies -- including one by the U.S. General Accounting Office in 1987 -- showed ESOPs to be a powerful incentive by comparing the profitability of companies before and after they set up ESOPs alone or against the track records of their competitors.