From the New York Times' non-probing April 5 story on Steven Rattner's ascension to auto czarito:
[I]n 2000, after a power struggle at Lazard, Mr. Rattner co-founded an investment firm, Quadrangle Capital, specializing in private equity investing focused on communications media. ... Quadrangle's funds have performed well, on average ... [snip]
One thing that is clear: Mr. Rattner knows how to make money . Not only has he stockpiled a personal fortune, but Quadrangle’s two private equity funds have performed well , despite some soured investments.
The first Quadrangle fund returned 15 to 20 percent, according to one investor . The second, which has yet to use all its capital to complete its investment portfolio, is already showing single-digit gains. ... [Emphasis added.]
Not so fast says author William D. Cohan, who claims to be an investor in Quadrangle's first fund. Writing in Fortune, Cohan notes that while the Wall Street Journal reported that the fund "fund delivered 'net annualized returns of 10.7%' to investors as of the end of 2008" (while the NYT had its "15 to 20 percent" gain) "It is very hard for Quadrangle's investors to see where the 10.7% IRR number comes from because it is based upon in part Quadrangle's subjective valuation of unrealized gains."
The key to understanding how the firm calculated the 10.7% IRR for the first fund rests with its fully audited valuation of the firm's unrealized investments. Some of these investments - such as those in NTELOS, Cinemark, a movie theatre operator, and Protection One, a home security-alarm company - are in the equity of publicly traded companies. Together these three companies alone represent 59% of the first fund's unrealized value as of December 31. The problem for investors in that fund - and the IRR calculation - is that in the first quarter of 2009, NTELOS' stock has fallen 32%, Protection One's stock has fallen 35% while Cinemark's stock has increased around 27%. The rest of the unrealized investments are in private companies that are valued through a series of generally accepted but purely subjective methodologies.
For instance, Quadrangle valued its equity investment in ONO, the Spanish media company, at $49.8 million as of the end of 2008, even though the senior debt of ONO trades at around 25 cents on the dollar, implying that investors don't think that loan will be repaid. To value the ONO equity then at anything above zero is a bit of an investment-banking dream. If the unrealized investments in Quadrangle's first fund are excluded from the IRR calculation - implying a valuation of zero for them - then the fund has returned to its investors (including me) on an annualized basis very little indeed: $1.294 billion of gross returns - before fees, expenses and carry, on invested capital of $1.079 billion. The fees and carry alone reduce that $215 million to close to nothing . Meanwhile, Quadrangle's partners and employees have taken out from the first fund alone $94 million in management fees and millions more in carried interest. Quadrangle declined to comment for this article. [ Emphasis added ]
Maybe a return of zero is an achievement in the market of 2008. And I still think Rattner may be just the man to help wring enough concessions from the UAW to prevent General Motors from requiring a permanent Treasury transfusion. But the gap between the legend and the reality seems to be growing. ... 1:25 A.M.