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What is Magic Johnson doing with these Chicago investors?

By September 16, 2017 No Comments

Dining at the West Hollywood Soho Club & Garden last year, Dodgers owners Earvin “Magic” Johnson and Mark Walter made plans to help hundreds of underprivileged, minority students in Chicago, and eventually thousands nationwide.

Walter, CEO of Guggenheim Financial, had talked with people in Chicago education circles about inventing a financially self-sustaining organization to mentor at-risk youth from third grade through college. He, Johnson and ahandful of other ultrawealthy people created it: Chicago-based Academy Group has begun buying ownership stakes in companies—starting with a Chicago financial firm—that will provide returns to run the organization and connect participants to profitable corporate employers.

“This is kind of a womb-to-tomb employment opportunity,” says Walter, whose insurance and investment company is headquartered in Chicago and New York.

Former McDonald’s CEO Don Thompson and Guggenheim Managing Partner Andrew Rosenfield are among the 10 or so people backing the effort so far, but can it work? Investing in companies is not without risks, and an economic downturn could dash the dreams of Academy students striving toward $20,000 in promised college scholarships, paid internships and high-paying careers.

Finding investment targets that support the mission will be key, Walter says. Academy aims to invest in profitable, privately held companies, like law firms, insurance companies and sports agencies, he says. It’s considering five Chicago-based companies now, in addition to others outside the city, after buying a chunk of Chicago Fundamental Investment Partners last October.

LONGTIME COLLEAGUES

Chicago Fundamental co-founders Levoyd Robinson and Brad Couri grew up on opposite ends of Chicago and became close over two decades working together at First Chicago Bank and hedge fund Citadel before founding their firm in 2005. Now it has $1 billion under management.

Couri also chairs the regional board of a national mentoring organization, Bottom Line. He met Walter on one of his routine fundraising calls, and their views converged on a self-sustaining model and reaching kids early, at about 8 years old.

That was Robinson’s age when his parents, an ex-convict and a nurse, sent him from the Lawndale neighborhood he knew as K-Town to a Des Plaines Christian school where small classes got him more attention. He credits that decision, plus a Howard University professor’s mentoring and First Chicago colleagues’ support, for nurturing his successful career.

“I was looking at it in my field, where there is a complete dearth of diversity in the investment management space, and that hasn’t changed in the 28 years that I’ve been doing it. And so the opportunity to go in and impact these kids at an early age and bring them along and get them prepared was huge,” Robinson says.

Walter provided money to Academy to buy a 24.5 percent stake in Chicago Fundamental. In addition he personally invested alongside Academy in complex Chicago Fundamental products, called collateralized loan obligations. While they won’t disclose how much was paid for the ownership stake, an earlier report puts the joint CLO investment at $160 million. Walter notes that it will take years to invest that amount.

The arrangement isn’t without benefits for Chicago Fundamental, which left its initial hedging strategies behind to focus on CLO funds that invest in below-investment-grade corporate loans. New laws enacted after the 2008 financial crisis require purveyors of such funds to invest their own money in the products, too, so as a co-owner, Academy’s CLO investment is helping meet that requirement.

Thirty Chicago teens took part in Academy Group's summer pilot program at former McDonald's CEO Don Thompson's foundation offices in the Fulton River District. - Mark Blanchard

Photo by Mark BlanchardThirty Chicago teens took part in Academy Group’s summer pilot program at former McDonald’s CEO Don Thompson’s foundation offices in the Fulton River District.

Chicago Fundamental won’t reveal past CLO returns, but a July Moody’s Investors Service report gives one of its funds a top rating and offers only a boilerplate warning: Returns are “sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change.”

Craig Stein, a Schulte Roth & Zabel lawyer in New York who specializes in the area, doesn’t see cause for concern. “CLOs did survive and thrive through the credit crisis,” he says.

There’s also the potential public relations lift in an oft-maligned and secretive hedge fund industry. It’s not the first Chicago financial firm to roll out a significant charitable contribution for education. Evanston-based Magnetar Capital last year gave $5 million to a financial literacy effort with the University of Chicago.

ACADEMICS JOIN EFFORT

Leading Academy’s education program are two former administrators from that prestigious institution: Tim Knowles and Shayne Evans left top posts to form Academy. They’d been talking with Walter for a couple of years about the possibility. Knowles formerly headed the university’s Urban Education Institute and the University of Chicago Charter School, where Evans was CEO.

Conversations with Walter “evolved from ‘Let’s do this with the financial services (field) for Chicago’ to ‘Let’s do this for the nation for a set of sectors over time,’ ” Knowles says.

There’s certainly a need. The rates at which Chicago public high school students graduate (in four years) climbed leading up to the most recent data, 2014-15, to nearly 75 percent, according to a Chicago Public Schools report, but they still significantly lag a national average of 83 percent. Only about 16 percent of graduates who head to college end up completing it, which is also below the national average of about 22 percent, according to the University of Chicago’s Consortium on School Research.

This summer, 30 Chicago teenagers entering their senior year at public high schools across the city took part in a weeklong Academy pilot that will feed into the formal program launching next year. It offers $5,000 scholarships annually for college, paid internships and a job that pays more than minimum wage on graduating from college. The Hispanic, African-American or Asian participants assembled in a loft-like lounge-classroom at Thompson’s recently rehabbed Cleveland Avenue Foundation for Education building in the Fulton River District.

That foundation’s focus—sponsoring organizations that offer career support, education and mentoring to urban students and young professionals of color—dovetails with the Academy’s vision.

Students gathered on couches for conversations about college applications, snapping their fingers as applause when peers spoke up with good ideas. There was also classroom instruction, with business case study discussions following a Harvard method. In addition, they heard from guest speakers like Harvard Business School professor Steven Rogers and Cook County Jail psychologist Nneka Jones Tapia. This fall, they’ll travel together to the Aspen Institute in Colorado for a leadership seminar.

Tim Knowles, who co-leads Academy Group with Shayne Evans, looks on during the organization’s recent summer pilot program mentoring Chicago teens. - Mark Blanchard

Photo by Mark BlanchardTim Knowles, who co-leads Academy Group with Shayne Evans, looks on during the organization’s recent summer pilot program mentoring Chicago teens.

One participant, Dominique Taylor, a 17-year-old who goes to school in Woodlawn and is one of 11 kids in her family, was eager to enter the Academy program. She says she’s had a lifetime of “struggle” but is determined to become a chief financial officer. She lists the ways Academy will help her achieve that goal, turning to Knowles during a group interview to confirm the scholarship money (he reminds her she has to earn it).

Academy also hosted third-graders at Walter Payton College Prep for six weeks this summer. That’s the age group it will target, but it’s filling its pipeline with some older kids for now to advance the program. It will pick 150 elementary school students by lottery this winter and select 150 high schoolers for the kickoff next summer. Summer sessions, after-school mentoring during the school year and weekend gatherings will take place in the city’s South and West Side neighborhoods.

The next logical city for Academy’s campaign will be Los Angeles, but there’s no date for that extension, say Walter and Knowles.

“Figuring out alternative ways of funding is something I think is a very powerful idea,” says Howard Rossman, who formerly led Mesirow Financial’s hedge fund investing and founded the Civic Leadership Foundation in Chicago to teach kids about leadership. He lauds the credentials of Knowles, who has counseled Mayor Rahm Emanuel on school issues, but wonders why the group didn’t work through one of the many existing mentoring organizations.

INVESTING GOALS

Walter says other groups aren’t set up for Academy’s unique financing structure. Doing the math during an interview, he explains that investing $50 million to $100 million in 10 to 20 businesses that each return 10 to 20 percent yields $100 million to $200 million annually for Academy, which has the “audacious goal” of reaching 17,000 kids.

The price tag for just the scholarships is $340 million, but that doesn’t include costs for all the programming and top-notch academics like Knowles and Evans, not to mention a back office overseeing the investments. Walter expects just a handful of staffers will administer the investments, perhaps in the Franklin Center building, where Guggenheim is headquartered.

“A lot of the people who are helping me are billionaires, and it’s always just a question of how big a check they will ultimately end up writing,” he says.

And if some of the investments fail, or he can’t attract more benefactors, Walter is confident he and his current co-sponsors can support Academy on their own.

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