Value shopper: at age 61, Michael Tennenbaum left his longtime employer, Bear Stearns, to form his own fund to invest in companies that others have shunned.

MICHAEL Tennenbaum spent 32 years at Bear Stearns & Co. before deciding to launch his own special situations investment firm. Tennenbaum Capital Partners LLC currently manages three private funds totaling $1.7 billion. Investors say Tennenbaum is in the process of launching a fourth fund, worth $2 billion Much of the dealmaking takes place at Tennenbaum's home in the Malibu Colony, an ocean-fronting property that features an Andy Warhol painting of his wife, Suzanne Tennenbaum, a lawyer and jewelry designer.

Question: What do you think of the market now?

Answer: I don't have an opinion on the market. It's the environment in which we live. But I'm more likely to look at the companies that have had the largest price declines than those that have gone up the most. Because our strategy is to analyze industries and companies and invest when they're out of favor. Even if they never come back into favor, we can still make money by recapitalizing. So we don't play the markets.

Q: What was your experience like at Bear Stearns?

A: I joined when there were about 500 people and it was a lot of fun. When I left, there were about 9,000 people. One reason I stayed there so long is they let me do pretty much what I wanted. I started out as a commissioned salesman. I ran the risk arbitrage department, which was one of the biggest in the world. Then I wanted to move to California and do corporate finance, which was a huge change.

Q: What compelled you to start your own firm?

A: A lot of clients benefited from my advice and, properly so, made a lot more money than I did. I thought it would be nice to do that, too. So I proposed to the firm that they set up a special situation investing business out here and have me run it. Then I went away on a scuba diving trip and decided that if I had real guts I would set up my own firm and do what I wanted to do and prove to myself that I could do it on my own. So I left. We left on very good terms and they're now a client, which they like even better.

Q: How was setting up your own shop?

A: It was scary. I grew up on a little island (St. Simons Island in Georgia) and I used to swim and dive a lot, and any time I went up to the high diving board I wondered why I was doing that. And that's the way I felt.

Q: What were your favorite deals?

A: We thought that just by being honest and smart and having good reputations people would invest with us. This was hugely naive. I'm embarrassed now to think that at my advanced years I believed that. We put together a list of very wealthy and successful institutions where I had been consistently profitable.

The first effort was Whittaker Corp., where we had already accumulated close to five percent of the stock with our own money and we now had a chance to buy a big block. We then went to these famous institutions and said, "This thing is around $9 a share. We think it's worth twice that. So this is probably going to be a deal. And let's go." Nobody would do it. We had zero success. Then we got a little lucky. Some friends of ours at Canyon (Capital Advisors LLC) also got interested in buying the block and knew that we owned a chunk of the stock and offered to split it with us. And we did that. In less than a year, the company was sold at around $28 a share cash.

This made an impression on some people and it gave us even more money to work with. More importantly for us, it provided an epiphany: that we really need to have money under our control. Because when you are buying out-of-favor investments, it follows that it would not be apparent to others that you should buy them. That's why they're out of favor.

Q: You were one of those people who would not invest in technology.

A: We thought it was a lot of crap and we said so. People said, "Oh, it's nice that you want to make 20 percent a year but I only want to make 100 percent." And we said the only guarantee we can give you is we won't make 100 percent a year. We looked at a number of these dot-com investments and the business assumptions were just irresponsible. I called them teen-age business plans. That's what bubbles are.

Q: Tell me about the deals you have a stake in.

A: One is called Pimco Aviation. It's a company that does heavy maintenance for aircraft. The founder wanted to phase out, so we bought half of his stock and put the other half in a profit-sharing account and took responsibility for running the business. We completely changed the board and the management. We installed an engineering department and an employee suggestion program. We plowed the cash flow of the company back into capital improvements. As of today, the stock is two-and-a-half times what we paid for it four years ago.

Q: You're also in Party City.

A: This company was actually insolvent. It's unusual that a company so insolvent could be restructured outside of bankruptcy and all the creditors were paid 100 percent. Sid Craig (husband of diet guru Jenny Craig) had invested in Party City and had seen his stock go from $1 a share to $40 a share and back to $1 a share. And when you have one million shares, this can be very upsetting--it doesn't matter how rich you are. So he asked us to look at it. Now the stock is around $12.

Q: When do you get out?

A: In both Pimco and Party City we own very large blocks of stock so we're not interested in selling them unless we think it is the right timing.

Q: You've advised Kirk Kerkorian when you were at Bear Stearns. What did you do for him?

A: Kirk was trying to raise money to build the MGM Grand and it was a difficult assignment because he wouldn't go on a road show. I took it on by making a video movie of him and sent the tape around the world and we were able to sell it using the video. I also helped him acquire a large ownership in Chrysler stock. He was always a great pleasure to work for and a brilliant businessman.

Q: When you were growing up did you have any idea that this is what you would be doing?

A: I didn't know what Wall Street was, I didn't know what a stock was. It was pretty hermetic. My father lived in Russia as a teenager and his parents sent him to the U.S. where he had some family in Georgia. My mother's mother was a medical doctor in Germany. She came here when she was nine months pregnant with my mother and she settled in St. Louis. The two ended up in Florida, where my father worked pet jobs in little retail stores in little towns, and my mother worked in a doctor's office for a while and then an insurance office.

Q: You've been involved in civic affairs, including being on a special advisory committee under Richard Riordan.

A: I had known Dick for a number of years and when he was elected mayor, he asked me if I would look into some financial aspects of the city. After I did that, I told him that we ought to get together the smartest people in town who could independently analyze the city as if it were a business and try to find out what was there. And to his credit, he gave us the authority to do that, but not any money (laugh). We had to spend our own money and our own time.

Q: What was the result?

A: We came out with a report that showed that the city was in worse shape than they said because they were postponing a lot of things like paving roads and cutting trees. They did not have decent systems for collecting their receivables, whether it was license fees or parking tickets. And they didn't have a comprehensive list of the real estate they owned. We made a number of recommendations, including that they always have a five-year budget so they couldn't transfer revenue and expenses around to disguise how things were going, so that the politicians who authorize projects would be held more responsible for their future implications. The mayor adopted our program as their budget plan.

Later on, he and I disagreed because I didn't think he was tough enough in administering it. It's always easier to criticize than to do.

INTERVIEW

Michael Tennenbaum

Title: Founding Senior Managing Partner and Senior Portfolio Manager

Company: Tennenbaum Capital Partners LLC

Born: St. Simons Island, Ga., 1935

Education: B.S. in industrial engineering, Georgia Institute of Technology; M.B.A. with honors, Harvard

Career Turning Point: Deciding to form his own special situations firm at the age of 61

Personal: Married, two grown children

Hobbies: Scuba diving, ski racing