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Ken Moelis Wants Your Money, Not Your Input

NEW YORK (TheStreet) -- Moelis & Co. is a boutique investment bank founded by former UBS and Donaldson Lufkin & Jenrette executive Kenneth Moelis, but its public filings ahead of a planned IPO appear suggest an ownership structure that has more in common with publicly-traded private equity firms.

Moelis & Co. is offering 7.3 million Class A shares and said in a Friday filing with the Securities and Exchange Commission. it expects that the IPO will price at between $26 and $29 a share. At the midpoint of Moelis & Co.'s range, the company would be valued at $1.4 billion. Shareholders in Moelis & Co., however, will have limited voting rights.

Due to a dual class structure, 96.6% of those rights will go to Ken Moelis, Chairman & CEO.

Moelis & Co. Seeks to Avoid Activists in IPO

In that sense, the best comparison for Moelis & Co.'s shares may be the publicly traded units in private equity firms such as Apollo Global Management (APO), Blackstone Group (BX - Get Report), Carlyle Group (CG), and KKR & Co. (KKR - Get Report), and not the investment banking boutique's primary competitors such as Greenhill & Co. (GHL), Evercore Partners (EVR) and Lazard (LAZ), or larger full service firms such as Goldman Sachs (GS) and Morgan Stanley (MS).

The distinction comes down to the voting structure of each respective firm.

Normally, corporations offer investors one vote for each share, meaning it is investors who effectively control a company. Publicly traded partnerships, in contrast, give founders autonomy to run their business but offer public investors distributions of the profits from those businesses and a limited ability to influence strategy.

Moelis & Co. will resemble the latter, meaning investors in the IPO will be giving up many of their customary rights.

But what are they getting in return?

Publicly-traded PE firms offer units to investors and not general partner interests, which would allow investors to do things like choose board members or weigh in on executive compensation. PE firms offer quarterly distributions to unit holders that amount to most of the company's cash flow from operations.

If general partners like Leon Black, Henry Kravis and David Rubenstein are successful in bringing new investor money into their investment funds and putting those assets to good use, distributions to unit holders can be quite high. If not, publicly traded PE units will be dead money.

So far, Moelis & Co. has been a story of disruption on Wall Street. Moelis & Co. advised over $1 trillion worth of transactions in 2013, according to its S-1 filing with the SEC, after a steady climb up Wall Street's so-called league tables. Revenue at the company has grown at a compound annual growth rate of 45% since 2007. In 2013, the company booked $411 million in revenue and net income of $70 million.

If those numbers continue to grow, distributions to shareholders could be strong. Moelis & Co. believes there is growing demand among corporations for independent advice. Merger activity, the business where Moelis generates most of its fees, is on the rise. Meanwhile, a crisis-stricken Wall Street has presented upstarts like Moelis & Co. with an opportunity.

All In On a Zero Sum Game?

But merger and acquisition fees are a bit of a zero sum game. Moelis & Co. has taken market share from larger firms like Goldman, Morgan Stanley, and more to the point, deleveraging banking conglomerates like UBS that gave the firm its start.

That means, in any given year, Moelis's revenue will be limited to the scale of activity in the M&A market and in other transaction businesses like IPOs. Those markets are on the rise, providing Moelis a tailwind. However, they are limited to whatever demand exists in a given year.

The PE industry, in contrast to the advisory business, isn't as much of a zero sum game. Billion dollar payouts for PE industry execs are more about picking home run investments than they are about stealing market share from competitors. If Blackstone made billions from Hilton Worldwide (HLT), it didn't impact whether Apollo could make even more money from LyondellBasell (LYB).

Moelis & Co.'s prospectus offers no suggestion the firm will expand outside of its core advisory pond into the potential ocean of private equity profits, but investors may need a better incentive to give up so much control.

Bottom Line: Moelis's offering suggests he wants to move into the league of Henry Kravis and David Rubenstein. If that is the case, he may need to branch out.

-- Written by Antoine Gara in New York

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