The Chairman
Authors: Stephen Frey
T
ABLE OF
C
ONTENTS
For Diana.
I love you so much. You are incredible.
A
CKNOWLEDGMENTS
A special acknowledgment to my editor, Mark Tavani, who did a tremendous job on this book.
My daughters, Christina and Ashley, I love you dearly.
And the people who have constantly been so helpful:Cynthia Manson, Gina Centrello, Kevin Big Sky Erdman, Stephen Watson, Matt, Kristin and Aidan Malone, Jack Wallace, Bart and Allison Begley, Bob and Allison Wieczorek, Scott Andrews, John Piazza, Marvin Bush, Gordon Eadon, Jane Barrett, Andy and Chris Brusman, Jeff Faville, Chris Tesoriero, Walter Frey, Gerry Barton, John Grigg, Jim and Anmarie Galowski, Tony Brazely, Dr. Teo Dagi, Arthur Manson, Alex Fisher, Chris Andrews, Barbara Fertig, Mike Pocalyko, Baron Stewart, Pat and Terry Lynch, Rick Slocum.
1
The Chairman.
The chairman of a large private equity firm is the ultimate decision maker. Which companies to buy. How many billions to pay. Who to hire as CEO. How many millions to pay.
If his judgment is flawed, the chairman loses everything. Maybe even his freedom. But if he negotiates the lies, lawsuits, and vendettas that haunt his world, he becomes one of the richest and most powerful men on earth.
CHRISTIAN GILLETTE GAZED OUT FROM the pulpit at a grim-faced congregation, then down on an open coffin—and Bill Donovan’s face. Until two days ago, Donovan had been the chairman.
Gillette was just thirty-six, but suddenly that enormous responsibility had been thrust upon him, the decision to promote him made by a razor-thin majority of Everest Capital investors late yesterday at the climax of an emotionally charged meeting held in a conference room overlooking Wall Street. The controversial vote had come within three days of Donovan’s death—as stipulated in the partnership’s operating agreement.
“The world has lost a great man,” Gillette declared, ending his brief eulogy. Donovan wouldn’t have wanted something long and drawn out. He’d been obsessive about efficiency—and the lesson had been learned.
As Gillette stepped down from the pulpit, he heard the muffled sobs of family, the stony silence of enemies. Donovan had touched many lives for better
and
worse. It was the inevitable consequence of being chairman.
“I’m sorry for your loss, Ann,” Gillette said quietly, getting down on one knee before the veiled widow in the front pew. “We all admired Bill very much.”
“Thank you,” she whispered.
Gillette rose and moved deliberately up the cathedral’s center aisle, pausing to acknowledge high-profile guests: George Stockman, U.S. senator from New York; Richard Harris, CEO of U.S. Petroleum; Jeremy Cole, quarterback of the New York Giants; Miles Whitman, chief investment officer of North America Guaranty & Life; Thomas Warfield, president of J.P. Morgan Chase. Each one standing up well before Gillette reached him. Pledging their loyalty and assistance in low voices after taking one of his hands in both of theirs. Each with a different agenda, but all focused on one thing: Gillette’s sudden control of billions.
Gillette gave them a subtle nod in return, studying their expressions with his piercing gray eyes. Gauging their sincerity. For the first time truly experiencing the power he now wielded. The three men who until yesterday had been his equals—Troy Mason, Ben Cohen, and Nigel Faraday—trailing him at a respectful distance as he worked his way up the maroon carpet. Not until Gillette had made it to the back of the church did the congregation begin filing out.
Dark clouds hung low over New York City and raw November gusts whipped trash and newspapers down Park Avenue as Gillette moved through the church’s arched double doorway. It had been a warm autumn—until the day of Donovan’s death.
Gillette paused at the top of the marble steps leading to the sidewalk, taking in the scents of wood smoke and caramel wafting from a street vendor’s cart. Taking in the moment. He’d dedicated the last ten years of his life to Everest—the powerful Manhattan-based private equity firm Donovan had founded two decades ago with just $25 million of limited partner commitments. Typically logging eighty hours a week for the firm. Rarely taking a vacation day. Suddenly, that sacrifice had paid the ultimate dividend.
A pretty blond woman walking past the church flashed Gillette a coy smile. He watched her move down the sidewalk, looking away when she glanced at him again over her shoulder. He’d been seriously involved with just two women during the last ten years, both of whom had left after only a few months when they realized they’d always come in second to Everest. The lack of companionship only made his desire that much stronger.
As the woman neared the limousine waiting to take him to the cemetery, Gillette allowed himself a final glimpse.
“Come on, Chris,” Cohen urged, clasping Gillette’s elbow and pulling him down the stairs. “You don’t have time for eye candy right now. We’ve got to get you to the cemetery.”
Until yesterday, Cohen and Gillette had been equals. Together with Mason and Faraday, they’d formed the managing partner team supporting Donovan. But now he’d risen above them. Now he had absolute power. There would be jealousy, maybe worse.
“Take your hand off me,” Gillette ordered. “And, Ben, from now on call me
Christian.
” He watched Cohen’s demeanor chill, but he didn’t care. He was going to establish dominance quickly. “Understand?”
“Is that a
sine qua non
?” Cohen asked solemnly.
Gillette’s right hand contracted slowly into a fist. He hated Cohen’s habit of using Latin. “Dead languages don’t impress me.” He’d been waiting a long time to say that.
Cohen’s lower lip quivered ever so slightly. “So it starts already?”
“Do you understand?”
“Yes.” Cohen hesitated. “Christian.”
As they reached the bottom step, a heavyset chauffeur emerged from the limousine and lumbered toward the back. The instant the chauffeur lifted the passenger door handle, the limousine exploded in a brilliant flash of white and yellow light, killing him and the blond woman walking past. The massive concussion spewed jagged metal fragments hundreds of feet in all directions.
Gillette brought his arms to his face but he was a fraction of a second too late.
2
Private Equity.
High-risk investment dollars committed by large institutions and wealthy families to a few financial gunslingers who operate from behind a shroud of secrecy.
The gunslingers’ mandate: Deliver
huge
returns. Fifty, 75, 100 percent a year—consistently. Much more than investors earn on money market accounts, bonds, or publicly traded stocks. And don’t tell anyone outside the circle how you do it. Confidentiality at all costs.
If they get it right, the gunslingers make their investors—and themselves—incredible amounts of money. Billions and billions. If they get it wrong, and the extent of the risks taken comes to light, they scatter for places where English is rarely spoken.
GILLETTE GLANCED PAST THE DRIVER into the rearview mirror of the hastily ordered Lincoln Town Car. The wound on his forehead had finally stopped bleeding at the cemetery, but there were several red stains on his starched white shirt, blood on his handkerchief, and he
had a thin maroon cut at his hairline. Stark reminders of how close he had come to quickly following Bill Donovan into the ground.
“You okay, Christian?” Cohen sat beside Gillette in the backseat. A wisp of a man with thinning, curly black hair, Cohen remembered every number he had ever calculated. He took off his glasses and cleaned the lenses with a tissue. He was only thirty-seven, but he already needed bifocals—the price of staring at a computer screen day after day. “You’ve got to be worried about what happened.”
“I’m fine,” Gillette answered firmly. Cohen was the one who looked like he’d seen a ghost right after the explosion. And he hadn’t been hit.
“Maybe you should skip the reception,” Cohen suggested gently.
“No.”
“Looks like you might need a couple of stitches.”
“I’m fine.”
“You don’t always have to be so tough.”
“Enough, Ben.”
“We’ll figure out who was responsible,” Cohen vowed angrily. “We’ll use the McGuire brothers. I’ll call Tom tomorrow.”
McGuire & Company offered security services—surveillance, background checks, investigations, and executive protection. It was a worldwide operation with offices stretching from New York to London to Hong Kong. Tom and Vince McGuire, brothers and ex–FBI agents, ran the firm for Everest Capital, which owned the company through its sixth private equity fund.
“It won’t take long to nail whoever did this,” Cohen added.
Gillette peered out the rear window. Faraday and Mason were in the limousine behind them. Escorting the widow from the cemetery to Donovan’s thousand-acre Connecticut estate for the reception. “Don’t waste the time or the money, Ben.”
“What?”
“I mean it.”
“There has to be a
quid pro quo,
” Cohen insisted. “People have to understand that we’ll come after them if they do something like this.”
“You’ll never figure out who blew up the limousine,” Gillette said. “No one will. Not even Tom McGuire. The same way no one will ever figure out what really happened to Bill Donovan in that stream.”
Donovan’s body had been found Wednesday morning, facedown in a trout stream that snaked through a remote part of his heavily wooded property.
Cohen squinted. The way he always did when he was startled or confused. “What do you mean,
’What really happened to Bill’
?”
“Don’t be naÏve, Ben.”
“Bill drowned.”
“Did he?”
“Christian, the police are sure he—”
“I walked that stream with Bill a few years ago. It isn’t very wide and it doesn’t get deeper than a few feet. It’s hard for me to believe anyone could drown in it accidentally. Bill was murdered,” Gillette said bluntly.
“My God,” Cohen said, his voice hushed. “I never even thought about that.”
“What about the limousine exploding? Doesn’t that tell you something?”
Cohen hesitated. “That’s a good point. I guess I—”
“There’s something I want you to do,” Gillette interrupted him.
“What?”
“Find out about the woman.”
“The woman?”
“The woman who was walking past the limousine when it exploded. If she had children, I want Everest to take care of them. And do it
anonymously,
” Gillette emphasized. “No money trail, understand? I don’t want some ambulance chaser turning generosity into opportunity.”
“I’ll see to it,” Cohen promised, slipping his black-frame glasses back onto the bridge of his nose.
They were silent for a few minutes while the Town Car headed deeper into the Connecticut forest.
“Mason’s angry,” Gillette spoke up as the driver slowed down ahead of a sharp curve.
“Why do you say that?”
“He thought he’d be chairman.”
“He would have if Bill hadn’t died so suddenly,” Cohen agreed. “Troy was Bill’s favorite. Everybody knew that. But I don’t think Troy’s angry. Just sad.”
“Troy wanted what I now have more than anything in the world. The same way Faraday did.” Gillette looked over at Cohen as the car came out of the curve. “The same way you did, Ben.”
Cohen’s pale cheeks flushed instantly. “You need to understand something, Christian. My wife and daughters are much more important to me than my career.”
“I know how devoted you are to your family,” Gillette acknowledged brusquely. He’d worked with Cohen for a decade and heard about the girls constantly. “I also know you wanted to be chairman. Don’t lie to me.”
Cohen pursed his lips, unable to hide his irritation at Gillette’s comfort with candor. “I would have done a good job,” he muttered under his breath.
“Do you think Troy will resign?” Gillette asked.
“How can he? Most of his net worth is tied up in Everest. If he resigns, he forfeits his stake in the firm. That’s the deal we all signed up for.”
“What do you think his stake is worth?”
“Sixty million. Same as yours and Faraday’s. Same as mine.”
Donovan had been careful to make each of the managing partners equal minority owners of Everest Capital.
“What if I fire Troy?” Gillette asked, aware that Cohen knew the ins and outs of Everest’s legal documents better than anyone.
Cohen had always been focused on details. Which was why he hadn’t been elected chairman yesterday, Gillette realized. Not even really considered. The chairman of a big private equity firm had to think strategically, and Cohen was constantly off in the weeds, chasing minutiae. He’d received only one vote—his own.
Gillette knew how many votes each of them had gotten after checking the minutes of the meeting just before the funeral. As chairman, he was the only one inside Everest—other than Donovan’s widow—who had access to them. He’d beaten Mason by a single vote. It had been that close.
“What happens then?” Gillette pushed when Cohen didn’t answer. “If I fire Troy.”
“We get an investment bank to do a formal appraisal of his stake,” Cohen answered. “To confirm the $60 million figure. Then we pay it to Troy in equal monthly installments over five years. But he doesn’t share in the upside if his stake turns out to be worth more than sixty later on. You, Faraday, and I keep that.”
“What if he’s terminated for cause?”
“You mean if he’s convicted of a felony?”
“Right.”
“He forfeits his stake immediately, and, again, the three of us get it.” Cohen shook his head. “There’s no chance of that, though, Christian. Troy’s a lot of things, but he’s no criminal.”
“Isn’t there a broader definition of cause in the partnership agreement?” Gillette saw a curious expression spread across the other man’s face. As if Cohen was surprised anyone else might know the complexities of the agreement as intimately as he did. “Something less black and white than being convicted of a felony?”
“Yes.”
“Something about committing acts that could harm Everest’s reputation or be detrimental to its business prospects.
Our
business prospects.”
“If you fired Troy using that clause, he’d sue us,” Cohen said confidently, “and probably win. Like our lawyers always tell us about the employment contracts of the CEOs at our portfolio companies, it’s very hard to rely on that clause if you want to fire them. You’ve got to have something more.”
“But it’s there,” Gillette prompted. “Right?”
“Yes.” Cohen hesitated. “Are you really thinking about firing Troy?”
Gillette glanced at the railroad tracks paralleling the road. He’d been fascinated by trains for a long time. Ever since that summer—years ago, a lifetime ago—when he’d been forced to depend on them. “What about Donovan’s stake in Everest?” he asked, avoiding Cohen’s question. “What happens to it now that he’s dead?”
“There’s a special exemption in the partnership’s operating agreement for Bill,” Cohen explained. “Because he was the founder, his widow stays in and shares the upside as we sell companies. She doesn’t get paid out right away in one lump sum like Mason would if he resigned. And thank God,” Cohen added quickly. “The widow’s share of Everest is worth more than four billion at this point.”
“But she has no authority,” Gillette spoke up. “She can’t tell me how to run Everest.”
“No, she can’t. As chairman, you now have total control.” Cohen paused. “Unless a significant number of the partners get together and vote to remove you.”
“Tell me about that.”
Cohen shrugged. “It’s pretty simple. If 60 percent of the partners decide to remove you, they can. Someone calls a meeting and they vote. But that vote can only be called once a calendar year. The only other way you can be canned is if you’re convicted of a felony. Then it’s automatic.”
“I thought I saw something in one of the ancillary documents to the partnership agreement that covered the widow’s voting rights,” Gillette said. “Does she have something different from everyone else?”
“Definitely. And it’s big.”
“Oh?”
“Yeah. No matter how many limited partners there are in the funds, she gets 25 percent of the vote. It’s a provision Donovan always insisted on. As I understand it, he had a tough time getting the limited partners to buy in to that early on, before we got here. But when his track record got good, when he started making all that money for the limiteds, they stopped caring about it.”
Donovan hadn’t advertised that. “What if we raise another fund?” Gillette asked, watching the train tracks veer away from the road and disappear into the forest. “Would she share in the upside of that one, too?”
“No. She keeps Bill’s stake in all of our existing funds, but she doesn’t automatically get a piece of any new ones we raise. She might come in as an investor in the next fund if we asked her to, but she wouldn’t get a piece of Everest’s upside share of that fund. She’d be a limited partner in that one like everybody else.”
Investors in Everest Capital’s private equity funds were known as limited partners, “limited” because they had no management authority over the fund. Gillette, Cohen, Mason, and Faraday were the managers. Responsible for identifying companies to buy; finding executives to operate them; and deciding when to sell. With Gillette now being the ultimate decision maker on all major issues.
The investors had limited financial liability as well. They couldn’t lose more than they put in. Which had never been an issue for any of Everest’s seven funds. Going back twenty years, each Everest fund had returned
at least
three dollars for every dollar invested.
Everest Capital earned an annual fee from the limited partners to cover expenses—for things like the salaries of Everest’s thirty-three employees and the lease expense for its Park Avenue offices. The aggregate fee—a percentage of the total dollars Everest managed—was a hundred million. Big money. But the real sizzle for Gillette, Cohen, Faraday, and Mason was the opportunity to share in the profits, or “ups,” from the sale of portfolio companies out of the funds.
Typically, Everest acquired ten to twenty companies with each fund, running the companies for three to five years after buying them. Significantly increasing profits before taking them public or selling them to bigger companies. In most cases cashing out for much more than they paid. Distributing the sale proceeds back to the limited partners after the transaction.
The kicker for Gillette and the others came after the limited partners had gotten back their original investment. Once that happened, Everest kept 20 percent of the profits. So, if the original investment by the limited partners was ten dollars and Everest turned that into forty over the life of the fund, Everest kept six—20 percent of the thirty-dollar gain. Of course, if the original size of the fund was ten
billion
and that ten billion turned into forty billion, the “ups” were six billion. Six billion split just four ways—now that Donovan was dead.
The last private equity fund Everest had raised—Everest Capital Partners VII—was 6.5 billion. It was the seventh fund Everest had raised, and was one of the largest of its kind. Donovan and Nigel Faraday had led the money-raise, completing it eighteen months ago. A little over half of the 6.5 billion was invested in seven companies.
Already, Gillette was planning a new fund—Everest Capital Partners VIII—which would be ten billion dollars. Along with the five billion Everest still managed in funds I through VI—and the 6.5 in VII—the firm would control more than twenty billion dollars of private equity capital. Once VIII was raised, Everest would become the most powerful private equity firm in the world.
