Canadian distressed-debt whiz Newton Glassman doesn’t want to be known as just a guy who makes his investors a lot of money.
Make money he does, as illustrated by the top-drawer returns from his Toronto-based firm, Catalyst Capital Group Inc., which runs more than $2-billion of assets and is consistently ranked among the best in the world at running private equity money. But it’s how he has made those returns that clearly engenders just as much pride in Mr. Glassman, and how others make their money that irritates him.
Well known in boardrooms, Mr. Glassman has laid low in public most of his career. He and his partners at Catalyst have avoided press attention even as they have played key parts in huge and high-profile restructurings such as that of CanWest Global Communications.
Now, however, Mr. Glassman is stepping forward more forcefully to highlight Catalyst’s accomplishments and to put the focus on what he says is the proper way to run a private equity firm.
With private equity once again in the spotlight (as a result of the uproar about U.S. presidential contender Mitt Romney’s background running Bain Capital, which became a political albatross), Mr. Glassman has strong views on what works and what doesn’t.
There are many sins in the private equity industry, in Mr. Glassman’s view. Some big firms are simply stockpiling assets to earn management fees, even if they have no hope of profitably investing so much cash. In his view, the value of diversification falls off after 20 investments. Firms take their share of profits on successful investments too soon, which can require fund investors to seek clawbacks later. Firms charge merger and acquisition fees for helping companies that their funds own do deals.
It’s that sort of thing that irks Mr. Glassman. “We think it’s absurd,” he says of the merger fees, as one example.
Just who is this guy who can sit in an office in Toronto and criticize a business model for giant firms such as Kohlberg Kravis Roberts and Blackstone Group – a business model that has made people such as Henry Kravis of KKR rich?
While Catalyst is relatively small, Mr. Glassman can point to his returns: Catalyst’s first fund returned almost 70 per cent. Its latest fund generated a 40-per-cent return last year alone.
He can point to the fact that the Institutional Limited Partners Association, a group that represents big private equity investors such as pension plans, recommends a set of best practices that look a lot like Catalyst’s. “They took our agreement and made it the industry standard,” Mr. Glassman says.
And he can point to his success in fundraising. Catalyst is raising its second fund in two years at a time when investors have shown no compunction about saying “no thanks” to private equity firms seeking cash.
Industry tracking firm Preqin said drumming up cash from investors proved “very difficult in 2011 and the year ended with two of the poorest quarters for private equity fundraising since before the market downturn.” And why not? The number of private equity deals flaming out as a result of bad balance sheets and top-of-the-market acquisition prices is growing daily.
Amid all that, not even a year after raising its third fund (which had a final close on March 31 after raising about $1-billion), Mr. Glassman’s firm is raising Catalyst Fund IV. The firm set out to bring in as much as $750-million and it appears it will have to raise that ceiling if it wants to accommodate everybody who wants a slice.
Catalyst is also turning one of its portfolio companies, Callidus Capital Corp., into the basis for another fund. Callidus is an asset-backed lender that finances companies that can’t get bank loans. It has returned close to 20 per cent a year.
Could Mr. Glassman be running a lot more money than he is? Given Catalyst’s success raising money, absolutely. But his beliefs require him to stay small. “By definition, it means I can’t be big.”
As an investor in distressed companies, Mr. Glassman is often casually referred to as a vulture. But really, he’s taking what others have messed up and trying to fix it. Vultures tear dead things apart for sustenance. Mr. Glassman looks to rebuild things that have been left for dead.
Gateway Casinos, a company pushed into trouble when a previous private equity buyer loaded it up with too much debt, ended up in his stable when Catalyst bought some of the debt and took control. The company is growing again, hiring people and preparing for a potential initial public offering, Mr. Glassman says.
“You’ve got to build something to contribute to society.”