Long before Washington even had a K Street, public servants have been cashing in via the private sector. Till recently, there was no better way to monetize government service that a late career switch to lobbying or law. But now there's a new business for the over-the-hill Washington player: hedge funds.
As Lynnley Browning reported in the New York Times last Friday, Richard Breeden, former chairman of the Securities and Exchange Commission, is now a hedge-fund manager, complete with $500 million under management, a Cayman Islands registry, and an office in hedge-fund capital Greenwich, Conn.—even though he "has no investing experience." Browning reported that, "Mr. Breeden is now perhaps the most senior former government official ever to run a hedge fund."
But not for long. Last week, Clinton Secretary of State Madeleine Albright, who has the same amount of investing experience as Breeden (zero)—announced the formation of an emerging-markets hedge fund. Albright Capital Management is backed with $329 million in seed money from PGGM, a Dutch pension.
Albright and Breeden are following what has become a well-worn path. In October, mammoth hedge fund/private-equity firm D.E. Shaw appointed Clinton Treasury Secretary Lawrence Summers as a part-time managing director, and Cerberus Capital, another mammoth hedge-fund/private-equity firm, named departing Bush Treasury Secretary John Snow as chairman.
Let's set aside the question of whether the arrival of politicians is a neon sign to hedge-fund investors to Cash Out Now! Instead, let's try to explain the phenomenon. There are several reasons—millions of them, actually—why high-ranking former officials are signing up with hedge funds. The money is excellent. Instead of billing by the hour or receiving retainers, principals of hedge funds and private-equity firms hold stakes in very lucrative businesses. At most hedge funds, managers generally receive a 2 percent annual asset-management fee and 20 percent of the profits they generate. K Street can make you comfortable. Hedge funds can make you filthy rich.
But Madeleine Albright and Larry Summers have no record of generating above-market returns. Why would a hedge fund want them?
First, hedge funds and private-equity funds are in a constant state of raising funds—from public-employee pension funds like CALPERs, from U.S. investors, and from investors around the globe. In a world of 8,000 hedge funds, many of them run by very rich but generally anonymous traders, it helps to bring boldface names along for sales pitches.
In addition to acting as highly paid greeters, former government officials can also function as doorkeepers. Firms like Cerberus and D.E. Shaw, which started life as rapid-trading hedge funds, are evolving into asset managers that seek long-term returns by buying and selling entire companies. In many instances, the less-crowded foreign markets offer the most compelling opportunities. Cerberus' list of holdings includes regulated foreign companies such as Air Canada and banks in Japan and Germany. Given the political issues that frequently surround international investments, funds need gray-haired globe-trotters to smooth the way. (Here's how another Cerberus employee, former Vice President Dan Quayle, describes his role at the fund: "travels throughout the US, Europe and Asia to meet with the heads of investment banks, corporations, buyout shops, potential investors, and other business leaders.") D.E. Shaw, the world's third-largest hedge fund, has similarly global ambitions. Who better to take along on forays into new markets than former treasury secretary, Harvard University president, and current Financial Times columnist Larry Summers?
The most recent duo of public servants turned hedge-fund managers is seeking to apply public-sector experience directly to the management of private capital. Rather than buy and sell dozens of stocks and trade them quickly, Breeden, who has landed consulting gigs monitoring bankrupt WorldCom and investigating shenanigans at Conrad Black's Hollinger, said he planned to buy a handful of stocks at undervalued companies—and then use his status as a corporate-governance expert to prod management into boosting shareholder value. In December Breeden announced his firm had amassed a 5.25 percent stake in underperforming restaurant chain Applebee's, and was nominating four members for the board of directors, including Breeden.
Albright is taking it a step further. Former foreign-policy hands such as Henry Kissinger supply advice to hedge funds and Fortune 500 companies on how geopolitical events affect their investments. Albright is taking this practice a few rungs up the value chain. Rather than simply sell advice based on her experience and connections, she's selling investment-management services based on her experience and connections. Investment management has much higher profit margins.
As more big institutional investors such as pension funds allocate capital to hedge funds, we should expect more such career switches. By 2009, it wouldn't be surprising if investors were listening to sales pitches for CRAM (Condi Rice Asset Management), Dick Cheney's Buckshot Capital (sole holding: Halliburton), and the Stuff Happens Global Fund, an arbitrage operation run by Donald Rumsfeld.
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