J U N E 2 012

R AY M O N D H A R B E R T,

S C I O N O F A N A L A B A M A I N D U S T R I A L DY N A S T Y,

H A S G E N E R AT E D S T E L L A R R E T U R N S A S A F U N D M A N A G E R .

S O W H Y I S H E S T R U G G L I N G T O F I N D I N V E S T O R S ?

P H O T O G R A P H B Y B R E N T H U M P H R E Y S

B Y J O H N H E L Y A R

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2 B LO O M B E R G M A R K E TS Month 2012

Harbert, left, offered Bear Stearns’s Luce, right, a job after a day of turkey hunting.

It was 1992, and the company that had made his dad, John M. Harbert III, a billionaire was eking out small profits and was $300 million in debt. Raymond proposed selling the core construction business, which dated back to the com-pany’s 1946 founding. The elder Har-bert threw his son out of his office, an associate recalls.

Raymond, who was 33 at the time, wouldn’t be denied; he eventually per-suaded his father to sell. Once the con-struction business was divested and the debt extinguished, Raymond pre-sented his father with another big idea: shifting the family business into fi-nance. John Harbert not only gave his approval this time, he loaned his son $3 million against his inheritance to launch the investment firm Harbert Management Corp. Father, son and four lieutenants celebrated by draining a bottle of Sheep Dip scotch, a whisky

that bills itself as “rich, warming, malty, young and sprightly.”

John Harbert died three weeks after that 1995 celebration and so didn’t live to see the results. Harbert Manage-ment funds averaged an aggregate 11 percent return for the 16 years ended on Dec. 31, 2010, compared with 6.1 percent for the Standard & Poor’s 500 Index, according to data supplied by the firm to investors. Harbert’s U.S. and European real estate funds enjoyed combined returns of 17 per-cent in 2011, according to the firm’s annual report. And Raymond’s first crack at launching a hedge fund pro-duced Harbinger Capital Partners—the firm run by Philip Falcone, who in 2001 took seed capital of $25 million and by mid-2008 had turned it into $26 billion of assets.

Harbert and Falcone parted ways in April 2009, when Falcone bought

a controlling stake in Harbinger for an undisclosed sum. The New York hedge-fund manager has since fallen on hard times; Falcone’s flagship fund lost 47 percent in 2011, according to in-vestors, and as of April 5 he said he was managing just $4 billion.

To Harbert’s frustration, his assets under management have also dropped, to $3.1 billion in mid-April from as much as $29 billion in 2008, despite stellar returns. The firm manages money in 10 asset classes, including hedge funds, private equity and ven-ture capital, with much of its money in-vested in property.

Harbert, who had $500 million of his own money tied up in the firm at the end of March, according to data compiled by Bloomberg, says he’s been unable to at-tract more money because institutional investors, chastened by the 2008 melt-down, are shunning smaller shops in

RAYMOND HARBERT,CHIEF EXECUTIVE OFFICER OF

BIRMINGHAM, ALABAMA–BASED HARBERT CORP., HAD A RADICAL

PROPOSAL FOR HIS FATHER.

June 2012 B LO O M B E R G M A R K E TS 3

Sources: Bloomberg, Harbert

favor of big, name-brand firms. About two-thirds of the money flowing into hedge funds since 2009 has gone to firms with $5 billion or more in assets, according to Chicago-based Hedge Fund Research Inc.

“You’re not going to get fired for investing with a big New York shop,” Harbert says. Even if you lose money, he says, investors prefer that a fund’s performance tracks its peers: “They’re not paid to take risks; they’re judged by how their fund does on a relative basis.”

The clients Harbert does attract are investing in a firm with consid-erable financial sophistication and global reach. The company has offices in London, Madrid and Paris and runs a private-equity fund in Melbourne. Some of Harbert’s most successful in-vestments have been in France and in the U.K., where he bought commercial real estate at post-financial-crash dis-counts in 2009 and flipped it for quick profits in 2010. For example, he put $39.9 million of equity into five retail and food warehouses north of Lon-don in June 2009 and sold them for $72 million in November 2010.

Harbert offers clients one perquisite they can’t get in New York. He takes them turkey and quail shooting on his 10,000-acre (4,050-hectare) south Ala-bama plantation. He also can get the best seats in the house at Auburn Uni-versity football games. The Alabama school, the alma mater of both Ray-mond and his father, won the NCAA Di-vision 1 football championship for the 2010–2011 season. Raymond has made major donations to the university, in-cluding a $5 million gift in 2007.

Harbert, now 53, isn’t a drawling ty-coon in the style of family friend T. Boone Pickens, the Oklahoma oilman. Harbert rarely sits for interviews, though he says he was bombarded with requests during the Harbinger years. He has spent much of his life wearing a professorial beard, maintaining a low profile in Birming-ham and neutra lizing his Southern ac-cent. “When you’re from Birmingham,

you have to work harder to convince someone in another part of the world they should invest with you,” says Har-bert, who shaves the beard off before hitting the road to raise money for new investment funds.

Harbert’s anonymity stands in sharp contrast to the celebrity of his protege Falcone, who with his wife, Lisa Maria, has become a figure on

the New York social and philanthropy scene. Falcone’s fund made $11 billion in 2007 betting on the imminent col-lapse of subprime mortgages.

Harbert and Falcone were an odd couple during the eight years in which Harbert Management was Har binger Capital’s parent. Falcone, the son of a Minnesota utility worker, became a Harvard University hockey player, contributed millions to charity and bought Penthouse founder Bob Guc-cione’s 27-room Manhattan mansion for $49 million after his big hedge-fund coup. Harbert, who was born into money, didn’t change his lifestyle after Harbinger took off. He lives in a 5,300-square-foot (490-square- meter) home in Mountain Brook, a Birming-ham suburb, and his idea of a big week-end is bird-dogging on his hunting reserve or staying home to cook Italian dishes for his wife and college sweet-heart, Kathryn.

People familiar with the Harbert-Falcone relationship say it became strained as it wound down and ended in the spring of 2009. Yet, Harbert has nothing bad to say about “Philip,” as he calls Falcone. “I’d say 85 to 90 percent of the Harbinger experience was positive,” Harbert says. Harbert says he admired Falcone’s command of detail in picking which subprime-backed securities to bet against. “From 2001 to 2005, it was fantastic,” he says. The Alabamian remains an investor in Harbinger’s flagship fund, whose main investment is in a com-pany called LightSquared Inc., which aims to compete with AT&T Inc. and Verizon Communications Inc. in pro-viding high-speed wireless Internet service. Falcone declined to comment for this story.

For better or worse, Falcone’s rise put Harbert Management on the map. “It was like winning the lottery on the way up, and it was, if not a black eye, at least a poke in the eye on the way down,” says John Casey, chairman of Casey, Quirk & Associates, a manage-ment consulting firm that has advised

AHEAD OF THE PACKHarbert has trouble raising money despite returns that generally beat benchmarks.

Harbert Management Funds

S&P 500 Index

11%RETURN

ANNUALIZED RETURN JAN. 1, 1995, TO DEC. 31, 2011

6.1%RETURN

THREE-YEAR AVERAGE ANNU-ALIZED RETURN

HARBERT EVENT

OPPORTUNITIES FUND

I N C E PT I O N 2006

HARBERT VALUEFUND

I N C E PT I O N 2007

HARBERT EMERGING MARKETS

FUNDI N C E PT I O N 2005**

*AS OF FEB. 29 **CLOSED SEPT. 2011

15%

12

9

6

3

0

–3

–6

–9

2 . 8 % *1 4 . 8 % *

–7.12 %

FIVE U.K. WAREHOUSES

$39.9 MILLION (JUNE 2009)

$72 MILLION (NOV. 2010)

1.84X INVESTMENT

HARBERT EUROPEAN REAL ESTATE FUND II(NINE TOTAL INVESTMENTS IN THE FUND)

R & D CENTER, SUNNYVALE,CALIFORNIA

$6.3 MILLION (MAY 2010)

$12.8 MIL-LION (MAY 2011)

2X INVESTMENT

HARBERT U.S. REAL ESTATE FUND IV( 16 TOTAL INVESTMENTS IN THE FUND)

INVESTMENT SALE PRICE GAIN

INVESTMENT SALE PRICE GAIN

4 B LO O M B E R G M A R K E TS June 2012

June 2012 B LO O M B E R G M A R K E TS 5

leader, came by to pay his respects to this major Republican donor.

“He could be pretty brash,” says Pickens, who first met John while rais-ing money for Pickens’s failed Gulf Oil takeover attempt in 1983. When Pick-ens told Harbert he would have to

check his schedule before committing to making a speech in Birmingham, Harbert said sternly, “I want you to be here,” Pickens recalls.

Raymond says his father wanted him to get an engineering degree and eventu-ally take over the construction business. He wasn’t pleased when his son instead chose to major in business at Auburn. After joining the family firm in 1982, Raymond managed Harbert Corp.’s real estate portfolio and, in 1989, led an at-tempt at a $500 million leveraged buy-out of Birmingham Steel Corp. That deal collapsed in February 1990, after financ-ing for such transactions dried up.

Harbert Management got off to a slow start, and the founder decided he needed help. “I had the entrepreneurial spirit but also a lot of naivete and ignorance,” Har-bert says. He courted Bear Stearns’s Luce, who had worked with him on the attempted Birmingham Steel buyout, inviting him to do some wild turkey hunting. As they relaxed after a day in the fields, Harbert popped the question: Would Luce become his No. 2?

Luce says he agonized for months before accepting. The reaction of his Bear Stearns colleagues was unani-mous: “They thought I was nuts.”

What Harbert lacked in experience, he made up for in hard work, say cur-rent and former colleagues. Harbert scouted prospective investments for his first European real estate fund by

investments rather than fees from clients. To keep the firm’s interests aligned with those of investors, he makes sure he and his 16 partners have skin in the game. They own about a quarter of the assets under manage-ment in each Harbert fund. “The Roth-

schilds charged some fees, but they made their big money out of putting their own money to work,” Harbert says. “I wanted to start a fund that looked like a merchant bank, and that’s what I still want.”

Until he broke away from the family construction business, Harbert spent his career in the shadow of his father, one of the South’s most powerful busi-nessmen. A 36-story office building erected by the senior Harbert is down-town Birmingham’s second-tallest structure, towering over his son’s 11-story office three blocks away. Ray-mond says his father, who fought in World War II, parlayed $6,000 of war bonds and troopship craps winnings into a construction business that rode the growth of postwar America by building major highways, airports and shopping malls, first in the South and then nationally.

John Harbert later branched out into coal mining, a business he sold to the Standard Oil Co. in 1981 for $400 million of stock. He became Ala-bama’s richest man and, upon his death, his widow, Marguerite, now 87, became its richest woman, according to Bloomberg data.

“He was charming as all get-out,” says Casey, who recalls John Harbert holding court at the Keeneland inves-tor presentation, during which Bob Dole, then the U.S. Senate minority

Harbert Management on how to mar-ket its funds.

Michael Luce, Harbert president and a former Bear Stearns & Cos. managing director, says Falcone’s success brought Wall Street to his door. “When Harbin-ger was hot, money was flowing in here like you can’t imagine,” Luce says. “There were wire transfers where we had a tough time figuring out who was sending the money.”

That Harbert is now swimming against the current is clear from the history of his Value Fund, a long-short hedge fund. Its returns have averaged 14.8 percent during the past three years, according to Bloomberg data. Yet, it had only $235 million of assets in mid-April. Meanwhile, Harbert’s new U.S. Real Estate Fund IV, which aimed to raise $250 million, closed to new investors in September with a total of $134.2 million. As of mid-April, Harbert had yet to attract in-vestors to new distressed-debt and commodities hedge funds.

As a result, Harbert has trimmed its workforce. The firm had 75 employees in its back office when its assets peaked in 2008; it had 55 in mid-April.

“Raymond’s performance has been quite brilliant,” says Alan “Ace” Green-berg, the former chairman of Bear Stearns. “Money managers have gravi-tated to the big guys, who they see as safer.” Greenberg, 84, was a friend of Harbert’s father and helped pitch the nascent firm to its first potential inves-tors at the Keeneland Thoroughbred racehorse auction center in Lexington, Kentucky, in 1994.

On the advice of consultant Casey, the firm is trying to raise its profile. Harbert has shifted original partner Charlie Miller from chief financial offi-cer to head of distribution, where he is leading the push to increase assets. He hired two new marketing executives in New York last year.

Even as he seeks outside investment, Harbert remains committed to what he calls the merchant-banking model, in which he depends for profits on savvy

B I R D - D O G G I N G F O R B I L L I O N S

‘ I WANTED TO START A FUND THAT LOOKED LIKE A MERCHANT BANK, AND THAT’S WHAT I STILL WANT,’ HARBERT SAYS.

riding around Sweden in the back of a van, looking at properties. Scott O’Donnell, a fellow passenger then working for Bankers Trust Co., was so impressed by the Alabamian’s diligence that he joined Harbert Management in 2002.

“He cares about making investments, not taking in fees,” says O’Donnell, who is now chief of Harbert’s European real estate operations in London. Like his boss, he is frustrated that it’s so tough to

attract outside investors, despite the firm’s earning a 28 percent return on its first European real estate fund and 15 percent on its second as of mid-April.

Harbert himself says he yearns to get his firm back to the $5 billion asset mark. “But if getting to a bigger size is

going to change our style of investing, we won’t go there,” he says.

JOHN HELYAR IS AN EDITOR-AT-LARGE AT BLOOMBERG NEWS IN ATLANTA. JHELYAR@BLOOMBERG.NET WITH ASSISTANCE FROM KATHERINE BURTON IN NEW YORK.

To write a letter to the editor, send an e-mail to bloombergmag@bloomberg.net or type MAG <Go>.

Posted from Bloomberg Markets, June 2012, copyright by Bloomberg L.P. with all rights reserved. This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity.

#C9630 Managed by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com/content.

Raymond Harbert’s father, John, right, loaned him $3 million to start his invest-ment firm.

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About Harbert Management CorporationHMC is an alternative asset management firm with approximately $2.7 billion in assets under management and committed capital as of May 1, 2012. HMC serves foundations and endowments, funds of funds, pension funds, financial institutions, insurance companies, family offices and high net worth individuals across multiple asset classes, including U.S. and European real estate, venture capital, mezzanine debt, independent power, U.S. and Australian private equity and public securities.

Harbert Management Corporation2100 Third Avenue North, Suite 600

Birmingham, Alabama 35203www.harbert.net

phone: 205.987.5500toll free: 1.877.427.2378

email: irelations@harbert.net

You can use the 13F Filing Summaries (FLNG) function to see Harbert Management’s holdings of stocks in the most recent quarter as reported to the U.S. Securities and Exchange Commission. Type FLNG <Go> on the Bloomberg Professional service. Tab in to the COMPANY NAME field, enter HARBERT and press <Go>. Click on Harbert Management Corporation in the results. For a pie chart that shows the allocation of Harbert’s portfolio to different sectors, click on the circle to the left of Current. Type HFND <Go> for the Hedge Fund Home Page function. JON ASMUNDSSON

HARBERT’S HOLDINGS

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