Lawrence Schloss, managing director of merchant banking at Donaldson, Lufkin & Jenrette, just can't get enough good ideas from commercial banks.
Mr. Schloss oversees DLJ's private equity fund, which buys or invests in a range of companies. With $3 billion to play with, the fund is one of the biggest around - so big, in fact, that it has closed the fund to further investors.
Such funds usually get a constant and immediate flow of acquisition ideas from commercial banks looking to lead lucrative financings.
But because DLJ's fund is part of an investment bank that many banks see as a direct competitor, it isn't commanding the same kind of interest. And that leaves Mr. Schloss shaking his head in frustration.
"We're underserved by commercial banks," he said in an interview. "They're missing the boat."
Commercial banks, he acknowledged, seem reluctant to bring ideas to DLJ because they feel safer talking to equity investors who aren't also lenders and underwriters. Banks also expect bigger rewards from companies that just do equity investing - firms like Kohlberg Kravis Roberts & Co. and Thomas H. Lee & Co.
But Mr. Schloss begs to differ: "That's incorrect because of all the financing needs that we have."
In addition to buying companies, Mr. Schloss said, the fund can invest in mezzanine financing. "Banks are missing a sizable investor," he said. "We don't have to buy the entire issue; we can buy just a piece of an offering."
Mr. Schloss said merchant banks forestall the current efforts of commercial banks to provide one-stop shopping because investment banks can underwrite senior bank loans and lead-manage high- yield bonds.
Indeed, DLJ just started its own loan underwriting business this year.
"The challenge is that DLJ does have its own bank loan underwriting," said Tim Conway, a managing director and head of corporate finance at Fleet Financial Group. "If you bring a deal, you might be competing with their own in-house group."
In addition, the prospect of leading high-yield bonds, which are frequently an integral and lucrative part of a leveraged finance transaction, are limited with DLJ.
"It's difficult for us to put them in the high-yield business because DLJ is No. 1 in high-yield," Mr. Schloss said.
Nonetheless, Mr. Schloss said DLJ could provide other rewards to commercial banks, including the lead financing positions on transactions DLJ originates.
"We keep track of those who show us ideas," said Mr. Schloss. "Wherever ideas come from, you should pay them back with additional transaction flow the other way."
Still, Mr. Schloss has an uphill climb if he wants to woo commercial bankers. "When we have a great opportunity, we're much more likely to take it to a pure financial buyer than to DLJ," said a lender at one of the largest banks in the country.
But others find the scale of DLJ's business makes it a compelling and important customer.
"Based on the relationships we have, we're finding ways to work effectively with DLJ," said Fleet's Mr. Conway.
