ALTERNATIVE ASCENSION

As Merrill Lynch, Citi and Morgan Stanley reeled from the sub-prime meltdown, alternative investment executives loomed as potential saviors.

Heads are rolling on Wall Street as some of the world's largest investment banks suffer massive third-quarter losses. Merrill Lynch chief Stan O'Neal was the first casualty on 30 October in the wake of multi-billion dollar write-downs courtesy of credit market losses. Then Chuck Prince stopped dancing at Citi, just three months after declaring Citi would “keep dancing” so long as the band played on, and predicting that liquidity in the market would not be affected by the US subprime mortgage crisis.

As the banks search for new leadership, they are turning to executives with non-traditional backgrounds – alternative investment fund managers. In these executives, bulge brackets perhaps see entrepreneurial energy as well as in-demand expertise with the market's fastest-growing niches.

At press time, New York Stock Exchange head John Thain had been selected as the new leader of Merrill Lynch. His name was not the first to emerge as a potential successor to O'Neal. Laurence Fink was widely expected to be named to the post. Merrill Lynch owns a non-controlling 49.8 percent stake in BlackRock, the publicly traded investment management firm Fink co-founded after spinning out from The Blackstone Group. Ever since the firm's genesis within Blackstone in 1988, Fink has overseen its staggering expansion and public float. The firm's assets have grown exponentially – from $1 billion to more than $1 trillion – and its product lines continue to evolve. In addition to platforms including fixed income, equity, and real estate, BlackRock recently gained a $25.4 billion fund of funds platform via its $1.7 billion acquisition of Quellos Group.

In the meantime, Merrill board member Alberto Cribiore has been serving as interim non-executive chairman of the company. Cribiore has a long history in private equity, as the founder of New York private equity firm Brera Capital Partners and, before that, as co-president of Clayton Dubilier & Rice.

While Fink's name has also been mentioned as a possible candidate for the Citi CEO post, the head of Citi Alternative Investments, Vikram Pandit, has been named as a possible successor to Prince as well. Similar to Merrill's investment in BlackRock, Pandit, too, built up an alternative investment business purchased by Citi – Old Lane Partners. The bank is thought to have paid between $600 million and $800 million for the $4.5 billion, multi-strategy hedge and private equity fund manager. Pandit and others founded the firm after quitting Morgan Stanley in 2005.

Among the more notable moves of new Morgan Stanley CEO John Mack is the rapid expansion and consolidation of the firm's alternative investment group – this less than three years after direct investment division Metalmark was forced to spin out.

Some market observers are worried about the future of private equity investments if highly leveraged deals go south. But compared to today's traditional Wall Street firms, private equity veterans, for now, look once again like the smartest guys in the room.

RANGEL PROPOSES ‘MOTHER OF ALL TAX HIKES’
A bill that would increase taxes on fund managers by $48 billion (€34 billion), characterised by its author as “the most comprehensive overhaul of the US tax code introduced since the Tax Reform act of 1986”, has been passed by the US House of Representatives, and will now be debated in the Senate. Introduced by House Ways and Means Committee chairman Charles Rangel, the bill proposes to counterbalance the $48 billion in tax revenue that would be lost from the act's repeal by increasing taxes for the alternative investment industries. It would cause carried interest to lose its capital gains tax treatment, a rate of 15 percent, and be taxed as ordinary income at a rate as high as 35 percent. Rangel said raising the tax on carry would generate $25.7 billion in a 10-year period. The bill also would force hedge fund managers to pay tax on any compensation deferred to offshore bank accounts. Republicans including New York Congressman Thomas Reynolds and Missouri Congressman Roy Blunt, the House's second-ranking Republican and party whip, are calling the bill “the mother of all tax hikes”. It is likely to be vetoed by President Bush if passed by the Senate.

TOM LEE: PLENTY OF DEBT FOR SMALL DEALS
Private equity pioneer Thomas H. Lee has joined the chorus of private equity executives proclaiming that buyout deals valued at less than $1 billion aren't jeopardised by credit market turbulence. Similar remarks have been made in recent months by Tony James, president of The Blackstone Group, and Tom Lamb, co-head of Barclays Private Equity. The founder of Lee Equity Partners, as well as the similarly named buyout firm Thomas H. Lee Equity Partners (with which he is no longer associated), Lee told a crowd of New York lawyers that there is still a huge amount of global liquidity and the US subprime mortgage meltdown has not resulted in a “cash crisis”, but a “crisis of confidence”. “There's a huge rat in the snake, meaning that there's a lot of LBO loans waiting to come out,” Lee said, speaking at Cardozo law school's alumni association dinner. “I would say there's plenty of money around for the small- to mid-cap [deals] – $1 billion and down can borrow a lot of money.”

HICKS LAUNCHES NEW FIRM
Less than four years after stepping down from the private equity firm that bore his name, Tom Hicks has launched an eponymous private equity firm, Hicks Equity Partners. In late 2004, Hicks left the Dallas buyout firm he co-founded, Hicks Muse Tate & Furst (now HM Capital Partners). He subsequently launched a series of projects under the umbrella of his family investment company, Hicks Holdings. Now, he is making a formal return to the private equity industry and has tapped Robert Swartz to lead the effort. Swartz was formerly chairman and chief executive of Centex HomeTeam Services, the home security installation and sales operations division of Dallas-based Centex Corporation. Eric Neuman and Christina Vest, two of Hicks' colleagues at Hicks Muse Tate & Furst who followed him to Hicks Holdings, are also managing directors of the new enterprise.

CARLYLE APPOINTS AMERICAS PR HEAD
The Carlyle Group has hired Ellen Gonda for its newly created post of director of communications for the Americas, part of an expansion that will double the size of the firm's communications team to six. Gonda was previously a director for corporate and financial communications at public relations firm Brunswick Group. Carlyle's global director of communications, Chris Ullman, said Gonda's position was created due to the dramatic increase in the volume of Carlyle's business in recent years.

NVP OPENS SILICON VALLEY OFFICE
US and UK-based venture capital firm New Venture Partners has opened its first office in Silicon Valley and brought in former Intel research director David Tennenhouse to lead its efforts. Tennenhouse was most recently chief executive of A9.com, the developer and operator of Amazon.com's search engine. Before that, he was vice president and director of research at Intel for six years. Prior to joining Intel, Tennenhouse spent two years as chief scientist and director of the IT office at the Defense Advanced Research Projects Agency, the research and development body of the US Department of Defense.

BLACKSTONE NABS HOST HOTELS HEAD FOR HILTON
The Blackstone Group has hired Christopher Nassetta, formerly president and chief executive of Host Hotels and Resorts, to take on the same roles at Hilton Hotels. Prior to joining Host, Nassetta co-founded real estate investment and advisory firm Bailey Capital Corporation in 1991. He also spent seven years serving as chief development officer and in various other positions with real estate developer The Oliver Carr Company