JFK Slept Here

Today, Castle Harlan's portfolio of 22 companies--from Morton's steakhouses and Marie Callender's restaurants and bakeries to little-known makers of automobile roof racks and high-school and college class rings--throw off earnings of about $450 million on more than $2.6 billion in revenue and employ more than 19,000 people. Since the firm's launch in 1987, it has raised more than $2.5 billion in equity capital and completed acquisitions exceeding $6 billion. Over Castle Harlan's 16-year history, its return to investors has averaged a stunning 38.5% a year. In August, Castle closed his fifth and largest fund, raising some $1.2 billion.

Unlike a venture capitalist, Castle does not pay for potential. "We're fundamentalists," he says. "We're prepared to go against the popular grain. As far as we're concerned, the future is now." He means it. An essential part of Castle's investment philosophy runs counter to common wisdom: He believes there's no need to assume huge risks in order to reap high returns. You can make a ton of money by acting the total contrarian, by investing in what's out of fashion or unpopular.

"We're prepared to go against the popular grain," Castle says. "As far as we're concerned, the future is now."

Castle searches for opportunities, such as the Kennedy house, that others have ignored. He invests in established businesses, not startups, with revenues and earnings that can be reasonably forecasted. He looks for companies that generate moderate growth and that enjoy dominant market share or boast control over their distribution. He favors incumbent managers who already know the business inside and out. He shuns companies that make commodity products or that are heavily regulated, and he has no interest in companies that rely on fashion trends or big technology bets.

And he will almost never pay more than 6.5 times a company's earnings to do a deal. "We're sensible people, but we're cheap," he says. "We don't like to pay that much." When the market for virtually everything overheated in the late 1990s, Castle preferred to stay on the sidelines. In 1997, his firm invested less than $14 million in deals (and nothing in dotcoms). "We just thought prices were awfully high. Daddy always taught me to buy low and sell high," he laughs.

Always, he's keenly interested in working closely with management--not just to better grasp the numbers but to understand the people and how they work with one another. Castle and his colleagues sit on the boards of each of the portfolio companies, keeping close tabs on everything. He knows how many steaks sit in the refrigerators of the 64 Morton's steakhouses. (It's be-tween 45,000 and 50,000.) He's often a demanding taskmaster. "He can laser-lock on the good, the bad, and the ugly," says Allen J. Bernstein, chairman of Morton's Restaurant Group Inc. "He has the ability to do what sodium pentothal does without giving you the shot."

It is not unusual, says Bernstein, for Castle to dig into the nitty-gritty of operations. Castle recently grilled Bernstein: "Why do you think they sold fewer steaks in Minneapolis last month?" He will delve into weekly and monthly financial statements and thoroughly debate action plans. As Castle puts it, "Regardless of who you are, if you have to stand up and explain what you did or why you're doing something, it probably refines your thinking. Besides, the best fertilizer on the farm is the footprint of the owner."

One place where Castle has put many a footprint is the restaurant business. It has been a favorite in-dustry of his for a longtime, which is why Castle Harlan's portfolio includes a good number of them. Besides Morton's steakhouses, there are McCormick & Schmick's seafood restaurants, Luther's Bar-B-Q joints in Texas, Charlie Brown's pubs in New York and New Jersey, and Marie Callender's. During the week of Thanksgiving, Marie Callender's sells 21 million pieces of pie in California alone. Why restaurants? "Twenty-five years ago, three out of every four meals were eaten in the home," he says, without missing a beat. "Today, it's less than half. The chains were initially established at the fast-food level, but as eating out became more ubiquitous, people wanted to have more moderately priced meals. That's our focus."

His best deal ever? Would you believe the company that made brake components for trucks? In 1994, his firm invested $16 million in Truck Components Inc. The company led its industry with a 40% market share. But it also owned Civil War-era foundries that posed environmental liabilities some feared could reach $400 million.

The threat scared off a lot of investors, but not Castle. He spent months on the issues, ultimately concluding that the present value of the exposure was about $16 million. And 16 months later, he sold Truck Components, taking out $82 million for a whopping 267.5% annual compounded return. "By studying it carefully," says Castle, "we found the company was a big bargain, and the exposure was manageable." Already, that seems to be the conclusion on the Kennedy house as well.

A Man's Sanctuary