NEW YORK — Charles W. Knapp, who was ousted as chairman and chief executive of Financial Corp. of America last year after the savings and loan company's massive financial problems surfaced, is trying to raise up to $1.2 billion to become the latest big player in the multibillion-dollar game of leveraged buy-outs.
A confidential proposal being circulated on Wall Street by Trafalgar Holdings, the investment firm that Knapp formed after his ouster from FCA, seeks investors willing to pledge at least $8 million each over the next eight years to deals in which Knapp's group chooses to participate.
If Trafalgar raises the maximum amount, it would control the second-largest investment fund largely devoted to LBO financing, outstripped only by the $2-billion pool being assembled by Kohlberg, Kravis, Roberts & Co., the best-known LBO firm.
Knapp was unavailable Monday for comment on the proposal. Other Trafalgar officials, who agreed to answer questions about the private placement proposal after The Times independently obtained a copy, declined to say how much of the minimum $400-million commitment needed to open the fund has been raised. The proposal, dated June 1, was originally scheduled to expire Aug. 1 but has since been extended.
Highly Competitive Market
Mark Dodge, formerly an FCA executive under Knapp and now executive vice president of Trafalgar Holdings and the partnership, would say only that "we are very pleased with the reception and with the caliber of the investors who are coming into the group."
Trafalgar is entering a highly competitive market for capital. Each of the four major independent LBO investment firms has been actively raising money to pursue investment opportunities. In addition to the Kohlberg, Kravis, Roberts pool, Forstmann, Little & Co. has reportedly raised $500 million; Gibbons, Green van Amerongen Ltd. has a $100-million fund, and Clayton & Dubilier, a smaller firm, has $46.5 million.
Beyond that, many larger investment houses have created pools of capital to make such investments.
"Almost everybody who is anybody in the LBO business has a fund," said Joseph L. Rice, a Clayton & Dubilier partner. He added: "All of those organizations are established organizations who have verifiable track records."
Once Nation's Largest
Knapp has not been known as a deal maker in the LBO world. He became famous in the early 1980s as head of FCA, which, by 1984, he had built into the nation's largest S&L holding company. By that August, however, the company's controversial financing and lending practices that had allowed it to grow so rapidly began to produce massive losses. Under pressure from federal regulators, Knapp resigned on Aug. 28, 1984.
Within months, he had formed Trafalgar Holdings, through which he has occasionally announced financial transactions of one sort or another. Most recently, Trafalgar Holdings announced in September that it has acquired an option to buy 23% of Minebea Corp., a Japanese electronics company known as an aggressive suitor of smaller companies. In March, Trafalgar raised with FCA the possibility of buying some of the problem loans that went on the books during Knapp's own regime, a feeler that FCA management sharply rejected.
Dodge said Trafalgar has $500 million in private investment funds under its management, not counting anything it has raised for the LBO proposal, which is known as Trafalgar Partners. He added that Knapp's reputation has, if anything, worked in his favor in attracting investors.
"There's no question that in certain circles there is some negative feeling about Charlie," Dodge said. "But it is irrelevant to this operation. There will always be controversy around anybody who is innovative, creative."
Dodge and Donald L. Reynolds, another former FCA executive now with Trafalgar, took pains to distinguish the Trafalgar offering from other LBO funds being raised on Wall Street. Indeed, the proposal bears some unique features.
In contrast to so-called blind pools, in which investors put up their money for management and investment by the pool sponsor, the Trafalgar offering requires investors to pledge a minimum commitment for an eight-year term but gives them the right, within limits, to spurn any deals that the sponsors turn up. For what amounts to this right of first refusal, the investor must make an up-front payment of 1% of his pledge.
That money--$80,000 in the case of the minimum $8-million commitment--buys the investor shares of preferred stock in Trafalgar Partners at the rate of $100 per share. The preferred pays an $8 annual dividend and carries a warrant to buy common stock in the venture at $10 per share, with all outside investors splitting 30% of the common and Knapp, his co-executives and employees splitting the remaining 70%.
The up-front investment is designed to provide working capital for the fund managers, Reynolds indicated.
There will also be a brokerage fee, payable to Knapp's Trafalgar Securities, of up to 1.25% of the investor's total commitment--$100,000 for the minimum $8-million pledge.
The Knapp group will seek out transactions in LBOs, venture-capital opportunities and special situations and offer them to the Trafalgar investors, who can each invest part of his or her commitment or decline. Trafalgar has the right to buy back, at cost, the preferred shares of any investor who spurns two consecutive completed deals worth a total of more than half his commitment.