Quadrangle's Connections

Steve Rattner and his partners are staking out positions across the media landscape

Steven Rattner left Lazard Frères & Co. in 2000 for the same reasons that scads of Wall Streeters lately have deserted big investment banks to form their own private-equity funds. Money. Freedom. More money. In addition, Rattner, who was hailed a decade ago as "the most-talked-about investment banker of his generation," wanted to climb down from his star's perch and vanish into the all-for-one, one-for-all collectivity of a true partnership. Rattner, now 52, could have started Rattner & Co. but instead joined with three Lazard colleagues to found Quadrangle Group LLC.

After a purposefully slow start, Quadrangle has made up for lost time of late, sinking a total $825 million into nearly 20 companies. A handful of these investments have been cashed out, most notably a $75 million investment in Cablevision Systems Corp. (CVC ) that returned a 100% profit in just 11 months. It will be years before the final returns on the rest are tallied, but at the moment the winners in Quadrangle's portfolio clearly outnumber the losers. Although the firm mainly invests in midsize media and telecom companies, other investors periodically invite Quadrangle into their megadeals. For example, BusinessWeek has learned that members of the Sony Corp.-led consortium that is paying $3 billion for Metro-Goldwyn-Mayer Inc. are trimming their equity investments by $50 million to allow Quadrangle to buy in.

"In a multibillion-dollar deal, the amount of money Quadrangle can put in is not that useful," says Thomas H. Lee, founder of Thomas H. Lee Partners, which has two investments in common with Quadrangle. "But they understand their industries so well that Quadrangle has become a preferred partner to other private-equity firms."

Not everyone is enamored of Quadrangle. Its quick sale of what was supposed to be a long-term investment in Cablevision stock antagonized Chairman Charles F. Dolan, all the more so because he had made room for Rattner on the company's board. In Rattner's defense, Cablevision abruptly shifted its strategy not long after Quadrangle bought in. There also is bad blood between Lazard Frères and Quadrangle, which in 2002 hired all three managers of a distressed-debt fund that Lazard had just set up. Lazard sued and the Quadrangle partners countersued, initiating a bitter legal battle that still drags on.

The knock against Rattner during his investment banking days was always that he was too calculating in his ambition and too eager to use his insider's knowledge of publicity to personal advantage. A flattering profile of Rattner in Vanity Fair in 1994 so enraged Felix Rohatyn, Lazard's legendary senior partner, that he nearly fired his protégé. Rattner still writes the occasional guest op-ed piece and is frequently quoted in articles about Wall Street and the media business, but he has shunned personal publicity for years now. "It's probably true that at parties Steve spent too much time with all the right people and no one else," says a close friend. "But to build a company, you have to subordinate your ego. Steve's done that, and he seems comfortable now in his own skin."

By all accounts, Quadrangle is an unusually democratic and collaborative sort of firm. "Steve made a decision early on that he wanted to be part of a genuine partnership, and he has carried out that promise to us," says partner David Tanner. However, Rattner and co-founders Tanner, 45, Peter Ezersky, 43, and Joshua Steiner, 39, are not exactly the Four Musketeers of private equity. Rattner owns a larger share of Quadrangle than any other partner and is clearly regarded by outsiders as preeminent in stature, if not in rank. (The partners all share the title of managing principal.)


What's more, Rattner's promise might well carry a Nov. 3 expiration date. "The big question is, if Kerry wins, what does it mean for Steve?" says Arthur O. Sulzberger Jr., a longtime friend of Rattner's, who is chairman of New York Times Co. and a limited partner in Quadrangle.

Rattner, an activist Democrat from way back, signed on with John Kerry during the primaries and was instrumental not only in raising large sums for the candidate but also in persuading 200 CEOs and other business leaders to declare their support. (Rattner's wife, Maureen White, is a finance chair of the Democratic National Committee.) If Kerry wins, Rattner is expected to be offered a job in the new Administration. "If Steve goes to Washington, can Quadrangle still be a force?" asks a dealmaker with close ties to the firm. "I can tell you that's not a happy topic over there."

If Rattner stays put, Quadrangle's big challenge becomes managing its growth. Its partners, who now number eight, are trying to fashion a more centralized and formal management structure without turning Quadrangle into a de facto Rattner & Co. in the process. Rattner himself is acutely aware of the dilemma. "When you have four partners, you make decisions one way. When you have eight, you have to make them another way," he says. "We don't know exactly what form a new structure will take, but I am determined not to have a personality cult."

Rattner is an unlikely Wall Street star in some ways. He never went to business school but got his start as a journalist, spending seven years as a New York Times reporter before landing an entry-level investment banking job in 1982 at the untender age of 30. Rattner made up for lost time, joining Morgan Stanley (MWD ) in 1984 as one of the first mergers-and-acquisitions bankers to specialize in media. This fortuitous assignment put him on the ground floor of cable TV and other emerging industries. He left Morgan in 1989 and burnished his media maven credentials to a high gloss at Lazard.

Rattner is not the incandescent sort of personality who lights up a boardroom merely by walking into it. However, he is a man of quiet intellect who listens as well as he talks and who has spent three decades cultivating relationships with people who matter. None of them has mattered more than Brian L. Roberts, CEO of Comcast Corp. (CMCSA ), the largest U.S. cable operator. Roberts met Rattner in 1985 and has included him in every major deal Comcast has done since. "Steve is a very smart guy," Roberts says. "He has followed this business for a long time and always gives you his best advice, even if it doesn't serve his own short-term interests."

Rattner began to recast himself as a lower-profile manager in 1997, moving up to deputy CEO at Lazard. He lasted two years, an eternity at the famously divisive superboutique. Rattner, Ezersky, Steiner, and Tanner spent months methodically planning their breakaway venture, meeting after hours in Rattner's Fifth Avenue apartment. Quadrangle was launched in February, 2000, and quickly raised $1 billion from 150 investors, nearly half of whom are current or former top executives of media or telecom companies. "What sets Quadrangle apart is they are really in the thick of what's happening in their area of functional expertise," says Russell Steenberg, who runs Merrill Lynch & Co.'s (MER ) private-equity unit, a Quadrangle investor. "They have the contacts; they hear the tom-toms."


Quadrangle's connections have helped it in countless ways, but the most visible payoff is its inclusion in "club deals" organized by bigger, more established players. Quadrangle had close ties to all three of the lead investors in the MGM deal -- Sony, Texas Pacific Group, and Providence Equity Partners -- and was particularly helpful in smoothing Comcast's deal-clinching, last-minute entry into the consortium. Last year, Quadrangle played a similarly catalytic role in helping the Hollywood billionaire Haim Saban pull together his $1.2 billion buyout of German TV broadcaster ProSiebenSat.1.

In both the MGM and ProSieben transactions, Rattner and his partners filled the same middleman role that they played at Lazard, only they were rewarded not with fees but with a chance to purchase equity. The ProSieben buyout already is casting a golden glow, but earning its way into high-profile club deals is a sideline for Quadrangle. "It's nice to have extra frosting," Rattner says, "but we are baking our own cake."

That is, Rattner and his partners spend most of their time scouring the less glamorous precincts of the media and communications world for opportunities of their own. They are hard-nosed value investors who, for all their high-powered connections, place primary emphasis on a thorough analysis of the fundamentals. Quadrangle's mettle was tested immediately, for the firm's birth coincided with the peak of high-tech mania.

Josh Steiner and Michael Huber, Quadrangle's telecom specialists, rejected dozens of potential deals before deciding to concentrate their value hunt on the fledgling regional carriers known as competitive local exchange carriers, or CLECS. (Huber, 35, was promoted to partner at the start of this year.) Over a span of two years, the duo met with executives of 45 companies in the struggling sector. In 2003, Quadrangle sank about $50 million into two CLECs: US LEC Corp. (CLEC ) and what is now NuVox Communications. "Unlike a lot of people in the investment world, Josh in particular did a great job in understanding our industry," says Aaron D. Cowell, US LEC's CEO.

Unlike most private-equity firms of its modest size, Quadrangle also invests in the debt securities of troubled companies. Its distressed-debt unit is run by the three partners whose departure so upset Lazard Frères: Michael Weinstock, 44, Andrew Herenstein, 41, and Chris Santana, 31. At Quadrangle, they manage a $900 million hedge fund and two lesser funds of about $65 million apiece. Quadrangle's distressed-debt operation is on a roll, racking up a double-digit gain to date in 2004 on the heels of a 45% return to investors last year.

Quadrangle's private-equity and distressed-debt funds have simultaneously invested in a half dozen of the same companies, including US LEC, Adelphia Communications, (ADELQ ) and Protection One (POIX ), an operator of alarm systems for homes and businesses. The collaboration on Protection One was especially significant in that Quadrangle succeeded in taking control of the overleveraged company, paying $122 million to acquire its senior bank debt and 87% of its stock. The private-equity fund put up $82 million and distressed debt kicked in the rest.

The Quadrangle partners meet every Monday, with Rattner calling out the agenda in his role as "coordinator." To bring more coherence to daily management of a firm that now has 44 employees, the partners are thinking of creating a three-person executive committee. Even if he were to remain at Quadrangle, Rattner would not necessarily be on it. "Steve is an important voice, but this is a true partnership," Ezersky says.

Quadrangle still has plenty of money to invest, but the five-year investment period of its inaugural private-equity fund expires next May. Had this not been a Presidential election year, Quadrangle most likely would have begun to raise a second fund already. The partners decline to comment on their plans, but the only alternative to fund-raising is to wind down the firm. One thing is certain: Raising another $1 billion will be a lot easier with Rattner than without him.

By Anthony Bianco in New York

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