| Steven Tananbaum: founded GoldenTree with a handful of colleagues |
STEVEN TANANBAUM IS well regarded in the asset management business. “Given Steve’s track record at MacKay, it’s no real surprise that he managed to achieve all that he has. He runs a very smart, very market-savvy business.” So says Joe McGrath, head of leveraged finance for Goldman Sachs, one of the top-three high-yield underwriters in the US. It’s rare, of course, for bankers not to speak well of their investor clients in public, but in the case of GoldenTree Asset Management the plaudits seem well deserved.
Tananbaum (pictured right) founded GoldenTree in March 2000 with a handful of colleagues, one confirmed client and $70 million to manage. Now he’s president and chief investment officer of a company with $5.5 billion under management and 60 staff.
Investment banks seemed to be confident of his ability to get it right almost from the start. According to Leon Wagner, co-founder and chairman of GoldenTree, “back when we had very few assets to manage, Wall Street covered us as if we were going to succeed”. Tananbaum adds: “It was a pleasant surprise. We got allocations on new issues which weren’t equivalent to our size at the time.”
It’s not like Wall Street to be so generous so fast, and it’s almost unheard of for it to be so for a company as new and as small as GoldenTree was then. As McGrath explains, though, Tananbaum “has done exactly what you need to do to build a successful business – build a good track record and surround yourself with good people”.
Ambition was central to Tananbaum’s decision to start the firm. “I was 35. I knew that I didn’t want to look back in later life and find myself saying that I’d missed out on something like this,” he says.
What’s more, he wasn’t particularly happy at MacKay Shields. “We were paid well, and our funds consistently performed among the best. But despite promises from New York Life we were never given equity, and the company didn’t seem to have the desire to grow. And everyone who ended up running a group ended up being fired. It might be smart for New York Life to own a money management firm. It might not be quite so smart for the employees to pay them taxes. At some point it’ll create a 1776-style revolution.”
He had also seen a gap to exploit. “High yield is one of the few asset classes where there are only about 10 above-average firms,” he says. “Of these, three or four were big, and I’d always see the same three or four faces at finals for long-only mandates. The only full-service high-yield investment firm with scale was Oaktree. I saw there was a business opportunity for a full-service credit asset-management firm focusing on high-yield credit.”
He’s not just talking high-yield bonds, but all products: bank debt, convertibles, mezzanine and distressed assets. And it’s not just one fund, but four. The largest is structured products, which has over $2.5 billion in assets under management. Long-only high-yield portfolios account for $1.5 billion, and absolute-return strategies make up another $1.4 billion. This summer GoldenTree started a new fund to invest in middle-market opportunities.
A good business builder The first person Tananbaum spoke to about his idea was Wagner. He has nearly 25 successful years in high-yield, encompassing not just deal making, sales and trading, but also setting up and running small firms. He’d spent nine years in fixed-income at Shearson Lehman before joining Drexel’s high-yield division in 1986. He survived the Drexel collapse in 1990 and co-founded Dabney/ Resnick and Wagner, a high-yield boutique in Los Angeles. He then joined another high-yield boutique, the Argosy Group, in 1993, oversaw its sale to CIBC in 1995 and stayed on as co-head of high-yield sales and trading until he left to join Tananbaum as chairman.
“One of the attributes I was looking for in a partner was someone who is good at building a business,” says Tananbaum. “I could have got someone from a big investment bank. They’re good, but the system they work in also makes them good. It doesn’t make them good at setting up a new business though. Whereas under Leon, Argosy became one of the top 10 underwriters of the 1990s.”
Setting up another business was the biggest appeal to Wagner. “I can’t minimize the job satisfaction,” he says. “I was earning a fraction of what I used to after leaving Drexel, but I get the biggest job satisfaction from building a business.”
Tananbaum was a good bet. Before setting up GoldenTree he had spent his entire 11-year career at MacKay Shields, a subsidiary of New York Life, and since 1996 had run the high-yield and hedge fund group. The former ranked in the top 5% of all high-yield mutual funds from mid-1991 to the end of 1999. Wagner rates him as the best high-yield manager. He had enough faith not just to join him from the start, but also to stump up cash to get things moving.
Within three months of start-up Tananbaum added three more partners, all senior players at their own institutions. Tom Shandell had spent 16 years at Bear Stearns, the first eight in corporate finance and the next three in high-yield bonds before moving into high-yield research. He’s now one of GoldenTree’s eight portfolio managers. Another is Steve Shapiro, who worked with Wagner at Argosy and CIBC. He ended up as CIBC’s head of media and telecoms research.
Every senior hire Tananbaum has made, in fact, was a top banker, researcher or trader at an established house. He had specific criteria. “What I didn’t want, especially at the partner level, were dissatisfied people,” he says. “I wanted those who had done well in their previous jobs, but wanted to do something different. We wanted to build stability here, not a shop with free agents or mercenary types.”
The firm has two co-head traders. Joshua Press joined from First Dominion and Linda Grillo came from MacKay Shields last year.
Treacy Gaffney, another portfolio manager, was a healthcare analyst, first at Smith Barney and then, for the two years before joining GoldenTree in 2001, at CSFB, and spent three consecutive years on the number one Institutional Investor All-American fixed-income research team. “We had three other number one ranked analysts applying for the same job,” says Tananbaum.
David Allen left Morgan Stanley last year after 10 and a half years, first in M&A and banking and then researching cable media and entertainment. The most recent hire was three months ago when Jonathan Ezrow joined from CSFB where he was co-head of US high-yield capital markets. He’d come to CSFB when the bank bought DLJ in 2000, and had spent two years running DLJ’s European high-yield operations. Both he and Allen are portfolio managers.
All the recruits, especially those who joined early on, were taking a risk moving to a firm with just $70 million under management. “I had a nest egg, so I could afford to take a risk,” says Wagner. “If I took a leap, they took a flying leap. They joined us at a time when they were at the highest level of title and compensation.”
But Tananbaum and Wagner had also thought of other ways to entice people to join. One was to line up commitments for about another $600 million in assets. That came from Deutsche Bank, which had agreed to be an investor in, as well as to raise capital for, a fund to be managed by GoldenTree. “Deutsche had never started a fund or an investment for a client that they hadn’t completed,” says Tananbaum. “And that gave us confidence.” It also earned Deutsche good fees while allowing GoldenTree to establish credibility – by the end of 2000 it had a total of $1 billion under management – and to get in stable long-term fees without giving the bank an equity stake.
Tananbaum regarded retaining as much equity as possible as crucial to GoldenTree’s success. He had looked at getting a large cash injection in return for an equity stake, but hadn’t found an offer that suited his needs. “There was one firm that was going to put in about $300 million in return for a relatively modest equity stake, but they insisted on being able to pull out their cash whenever they wanted while also retaining their equity stake. That struck me as pretty stupid for us.” Instead, Wagner agreed to fund the firm in return for a senior partnership, the $600 million fund provided fees early on, and the equity was left intact.
Sharing out the equity The plan was to use that as an incentive to new recruits. “A lot of people setting up funds want to do as much as possible but retain as much as they can of their equity,” says Wagner. “They want to grow, but because the founders hang on to the equity they can’t.”
Tananbaum went for exactly the opposite approach. “There are 18 equity holders at present, and my economics are less than 50%, and I’m proud of that. I’d rather share a gusher than own a dry well.”
Thus far the firm has done well in asset growth and returns. Its high-yield master fund II, for example, had brought in net gains for the year to the end of July of over 13%, roughly double the return of the CSFB Tremont hedge fund index. “We’ve done slightly better, on an absolute and relative basis, than we did at MacKay,” says Tananbaum. That said, it has been an unusual time for bond investing. “We hadn’t anticipated buying a distressed bond at 30 cents which by year-end would be worth 110 cents, or buying one at 80 cents, and then watching it drop to 30 cents before it rises to 100 cents. And we’ve had that in a lot of bonds.”
A lot of investors got burnt trying to play those trades. GoldenTree, on the other hand, says one banker, “is not afraid to get their hands dirty in complex situations”. That would make GoldenTree a very active participant and trader. It’s no wonder the banks still like it.
