Back to basics

Michael Huber has a friendly manner, but answers questions in a quick, efficient way that avoids preamble and gets straight down to details. It seems a style befitting of an executive whose career has largely centred around operational improvements – first for the Quadrangle Group’s portfolio companies and now at the firm level, too.

The 42-year-old president and managing principal of Quadrangle responds directly to questions, doesn’t speculate and doesn’t linger much on backstory.

That’s exactly the type of leadership the TMT-focused firm needs right now, according to one of its limited partners. “[Huber is] a nuts-and-bolts, operator-type guy and he doesn’t necessarily need the limelight,” the LP says. “The last thing we need are any more spotlights [on the firm]. We need this portfolio to run its course and maximise its value. From that standpoint, Michael is the right guy to do it.”

Huber quickly talks through some of the turbulent events in 11-year-old Quadrangle’s recent past that have catapulted him to its helm: Quadrangle co-founder and public face Steven Rattner left abruptly in 2009 to take a high level position with the government; the resulting key-man vote to continue the investment period of its $2 billion second fund; and later the allegations that Rattner and, by extension, Quadrangle, were somehow mixed up in a pension pay-to-play scandal erupting in New York.

Huber wasn’t entirely comfortable talking through those points, but he’s had to do so many times before – and that process is one that he discusses at length. Starting in the spring of 2009 when Rattner resigned, Huber and firm co-founder Joshua Steiner together took control of day-to-day operations and made a concerted effort to meet with all their limited partners.

They were more than simple visits from managers to investors. In some cases the pair was meeting with LPs who’d only recently been visited by Rattner about a potential third fundraise, and had been assured of Rattner’s strong commitment to Quadrangle. They had to explain not just Rattner’s departure to head the government’s team restructuring the US auto industry, but then also his resignation as “car tsar” after only six months in the job amid allegations that Rattner was somehow involved in pay-to-play behaviour linked to Quadrangle’s second fund, another issue on which investors were understandably keen to be briefed.

Further complicating matters, Huber and Steiner in many cases were meeting the firm’s LPs for the first time. Relationships with investors had always been Rattner’s responsibility. When he left in 2009, a key man provision was triggered in the second fund whose investment period had less than two years. LPs overwhelmingly voted to keep the investment period intact – no small thing given Quadrangle’s struggles were set against a backdrop of economic uncertainty and volatile market conditions affecting investors.

“During the unbelievably difficult market environment in early 2009, our LPs patiently and diligently worked through the issues and made very informed, thoughtful decisions,” Huber says, noting the firm remains on good terms with the LPs who did vote to terminate the fund. “People made decisions that they thought were appropriate and in their best interests. I have no problem with that,” he says.

the track record

Quadrangle traces its roots to the telecoms, media and communications group at Lazard Freres. Its co-founders were former Lazard bankers Rattner, Steiner, David Tanner and Peter Ezersky.

In 2000 Quadrangle formed a board that included a number of media titans, including US moguls Barry Diller and Craig McCaw, and took the fundraising market by storm, raising half of a $1 billion debut fund in just a few months by tapping into its founders’ networks. It went on to attract the balance of commitments from traditional institutional investors.

Steiner and Ezersky remain with the firm, but Tanner left in 2007 to lead a private equity unit for agribusiness Continental Grain. Huber joined Quadrangle in 2000 after working at Lazard for about a year in the media and telecom group, prior to which he focused on telecom for Donaldson Lufkin & Jenrette.

Quadrangle’s first fund enjoyed a large amount of deal flow in its chosen sectors, Huber says, but also expanded its mandate by investing in distressed debt starting around 2002. It created Quadrangle Debt Recovery Advisors, a credit-focused team with ex-Lazard executives including Michael Weinstock, Andrew Herenstein and Christopher Santana.

“We did a significant amount of distressed investing in our sectors, starting in 2002,” Huber recalls. “We were limited to certain sectors, but we were flexible about how we invested in those sectors.”

As Fund I was investing in the early part of the 2000s, opportunities in traditional media were drying up as the growth of the internet quickly disrupted traditional revenue drivers like advertising and subscriptions. Industry changes were exacerbated by the financial downturn in 2002. So the firm backed away from traditional media, leaving Fund I heavily weighted toward cable providers. “We invested in a number of recurring revenue businesses, cable companies, wireless companies, companies where there is a monthly recurring revenue cycle. These companies are recession- and downturn-resistant businesses,” Huber says.

Fund I is returning just under 12 percent net, “which, from what LPs tell us, puts us in the middle of the pack in private equity for a 2000 vintage fund” and even better relative to the media and telecom sector in general, which was down 70 percent to 80 percent after the telecom bubble burst in 2000. That also beats the NASDAQ, which is still down about 40 percent from where it was during the telecom bubble, Huber says.

Fund II raised $2 billion in 2005. The second fund included much more of a public institutional presence than the first fund. Many of the high net worth individuals from the first fund came back into Fund II, but with smaller commitments, Huber says.

Fund II also is the vehicle linked to allegations Rattner paid phony fees to political fixers – most of whom have since plead guilty – to secure roughly $150 million in commitments from New York’s public pension systems.

Quadrangle distanced itself from Rattner during the pay-to-play investigation, calling Rattner’s alleged conduct “inappropriate, wrong, and unethical”, and last April “resolved” its role in the matter by paying a total of $12 million to settle with the US Securities and Exchange Commission and former New York Attorney General Andrew Cuomo. Rattner eventually settled too, paying a $10 million fine, and was banned from appearing “in any capacity” before public pensions in New York State for five years as well as from investment advisory work for two years. He did not admit wrongdoing, nor did the firm.

Fund II is still relatively immature as the average holding period is still less than four years, Huber says. The fund, though, is performing well, having returned about 35 percent of the capital the firm has called, net of fees. “That’s the acid test. At the end of the day, LPs care about [if you’re] giving them money back. Holding values and carrying values in the interim are nice to know, but I’m not sure people put a huge amount of weight to those.” Fund II is “somewhere” between first quartile and top of the second quartile, Huber says he is told by the firm’s LPs.

expanding and ‘right-sizing’

Over the years, Quadrangle has launched various business lines and offices that have mostly disappeared [see timeline]. The debt business was spun out in 2008, the same year a hedge fund unit, Quadrangle Equity Investors, was wound down.

Quadrangle Asset Management was established in March 2008 to manage some $5 billion on behalf of billionaire and New York City Mayor Michael Bloomberg. Last year, Bloomberg reportedly moved the capital out of Quadrangle and into a firm called Willett Advisors, where Rattner joined to work as an “informal advisor” along with several other former Quadrangle executives. 

In 2007 and 2008, Quadrangle opened offices in London, Hong Kong and Silicon Valley, all of which have since closed. The firm had added those offices and staff “without increasing fee income, and that cost structure given the post-Lehman Brothers fundraising environment was not sustainable”, says Huber. “We [worked] with all the partners to figure out the right size of the firm.”

Earlier this year, Huber took the reins as the sole head of Quadrangle as Steiner decided to step back into a senior advisory role position. Other personnel changes included the departures of Andrew Frey and Ed Sippel, both of whom focused primarily on new investments.

To boost the firm’s capabilities around supporting portfolio companies, Quadrangle hired Steven Felsher as a senior advisor from Grey Global Worldwide Group, and Thomas Kohut, formerly with Ernst & Young, as a principal. The firm also recently hired Puneet Gulati as its chief financial officer. Puneet was previously CFO of Evercore’s private equity business.

Huber says the current Quadrangle team is “excited” by the task at hand, which is simply to improve the investments in the portfolio and maximise value for LPs.

“I’m quite energised,” he says. “This is the part of private equity that I like the best – working with portfolio companies, digging into operations and strategic issues, working with management teams. I got into this business to do that … If we can increase the value of the fund by 20 or 30 percent over time, for a small group of people to do that, that’s a great accomplishment. We’re very excited about the asset base we have.”

rebuilding relationships

In 2009, Huber sat through some tense meetings with frustrated investors trying to understand what had happened at the firm.

“Most of the time, when I have had a difficult discussion with an LP, it’s not because of their views, it’s because we hadn’t done as good a job as we should have in communicating with them,” Huber says. He stresses those meeting were more common back in 2009, and “less so now” as the firm has opened up more to its investors.
“I’m never afraid when I walk into the room that I’m going to have an unreasonable conversation. That doesn’t mean we always agree on everything,” Huber says. “But ultimately we and our LPs want the same thing: a great outcome for our funds, and it’s my job to explain clearly what we are doing to achieve that.”

Since early 2009 Quadrangle has had a system in place to ensure it visits its largest LPs in person at least a couple times each year. It has also implemented quarterly limited partner advisory committee calls, which it is finding to be a useful communications tool in addition to one-on-one investor meetings.

“We’ve constantly re-evaluated our interests in line with our LPs, and we’ve made changes and then sometimes we go back and make more changes,” Huber says. “That really simplifies the relationship with LPs, if they think you are doing well by doing well by them, as opposed to, they might be doing well, but you’re doing great.”

Perhaps the easiest thing Quadrangle did to build good will with investors was change the fee structure of Fund II from an 80/20 deal fee split to give 100 percent of deal fees to LPs, Huber says. The firm’s distribution structure was also shifted to a European-style “waterfall”, meaning GPs would not take any carried interest until they have returned 100 percent of invested capital. And Quadrangle also told LPs its principals would kick in more of their own capital to pay for the firm’s operations, supplementing the management fee.

Quadrangle also established a compensation system that aligned the GP more fully with LPs, he says, implementing a bonus incentive driven by maximising realisations, rather than by boosting fee income. The bonus is paid by the firm’s balance sheet and is triggered solely by distributions to LPs. It shifts the GP’s focus for maximising net income to creating value and distributions.

soldiering on

These days, Huber spends much of his time on the road meeting LPs and keeping them updated on the firm’s portfolio management work. Fund I, which closed on $1 billion in 2000, has about three companies left to sell. That fund is in the middle of its fund life extension period and Quadrangle would like to exit it fully. Fund II, whose investment period ended last year, has a portfolio of 10 companies and about $300 million left for add-on investments.

There is no Fund III in sight as of now, though Huber will “absolutely” not say Quadrangle is in wind-down mode. Depending on how the firm’s two funds perform in the end, the last chapter in Quadrangle’s story may be far from written.

“If Michael puts up some spectacular numbers, could there be a Quadrangle III? It’s improbable, but it’s not an impossibility,” says one Quadrangle limited partner. “The nice thing about this business is that performance forgives all sins. If they come through and there’s a story to tell and it gets validated, people will look again to say, ‘Okay, potentially.’”