GoldenTree Asset Management is one of those boutique money managers that arrived on the institutional scene at exactly the right time with an idea that immediately attracted assets. Steve Tananbaum was a credit specialist who joined MacKay Shields Financial Corp. LLC in 1989 and by 1991, had oversight of its high-yield strategies. In 1997, he formed a hedge fund division for MacKay Shields and was lead portfolio manager. But he tired of working for a big company. He knew Leon Wagner from his role as co-head of high-yield sales and trading at CIBC World Markets. In April 2000, they formed GoldenTree to manage credit strategies, including hedge funds, long-only and structured portfolios. Mr. Tananbaum handles the investment side and Mr. Wagner, operations, sales and marketing. In just less than five years, assets top $6.5 billion, 94% of it from institutional investors. Messrs. Tananbaum and Wagner spoke to Senior Reporter Christine Williamson about their young firm.
Q Why did you decide to form GoldenTree?
Mr. Tananbaum: I left MacKay Shields because I wanted to be an owner; I wanted to control my destiny, rather than be part of a division of an asset management firm. I had been managing high-yield portfolios since 1991 and for most of the indices of companies with assets of more than $1 billion under management, I was No. 1 on that list. So when I originally got a commitment for a hedge fund from Deutsche Bank, as well as a commitment from them to raise a structured product, raising high-yield assets, I was ready.
Leon had of a reputation of being something of a phoenix in our industry. He headed sales for Mike Milken (at Drexel Burnham Lambert); he started a smaller firm, Dabney-Resnick, and was one of the founders of Argosy Group, which later was sold to CIBC. He turned that operation into one of the top 10 underwriters. So he had a good record of success building businesses.
Mr. Wagner: One of the things Steve always likes to say is that when you look at the number of competitors in the value equity market, the top decile could be 40 managers, let's say. In our space, the top decile might be five managers. So the competitive world we're in is much smaller and much more specialized.
Mr. Tananbaum: Leon brings up a great point. One of the kickers for me was that when I used to pitch pension funds for long-only business, I always ran into the same two or three people. (At MacKay Shields) I was running about $7 billion and we were capacity constrained. I just saw that there was a void in terms of quality managers. I believed that if I was able to do well, we would have no trouble raising assets because there was this imbalance between demand and good managers.
Q You seem very happy, are you?
Mr. Tananbaum: You're happy when you win.
Mr. Wagner: I really am. I always say about my career that I've sold a lot of good investments and I've sold a lot of bad. Good investments are easier. I've worked in places where the culture made it not much fun to come to work every day. Going into business with Steve helped save my life. It's a much more rational workplace than where I used to be.
Q What kind of culture have you created?
Mr. Tananbaum: I think a lot of people who are proprietors like to say: `Everybody likes working here. It's the best place in the world!' Like they said on Seinfeld: Yada yada yada.
But we've tried to look for some consistent traits and qualities in our partners and that has contributed to the culture. We look for people who have excelled in their prior roles. We're big believers that prior success breeds future success, that there's a correlation.
Especially at this part of the cycle, we find that a lot people are going into hedge funds for the money. I understand that, but we want people who genuinely find the investment process interesting, who genuinely find it fun, who genuinely are thoughtful about it. If they are not (like this), you're going to lose (in terms of performance) to the kind of people who are thinking about (investment) positions all the time. We've gone after the people who are not likely to say, `I can get an extra dollar over here, so what are you going to do for me?'
During an interview at MacKay Shields, I told someone that our people tend to get approached (by recruiters) within a year of joining. I asked him how he would react and he said, "I'd give you a chance to match." I said to myself, "That's not my kind of guy." We've looking for people who want to be partners. There are people out there who are terrific talents who want to eat what they kill. That's not the kind of person we're looking for at GoldenTree.
Q How are you convincing your staff to stay?
Mr. Tananbaum: We looked at this carefully and we've distributed equity pretty broadly. We have 14 partners now and 22 equity holders. We're in the middle of compensation right now, so that number's about to grow. We haven't lost anybody because we have the right culture. People believe we will be fair, and we've been demonstrative about how we want to drive compensation. We've shown the ability to be a meritocracy. If you create the right environment, you improve the probability of keeping people.
Q GoldenTree has grown quickly. Have you reached capacity?
Mr. Wagner: What we like to say in this context is that performance is first among equals. We are never going to sacrifice performance. As a result, we've closed our long-only products. We currently are not taking new assets into our hedge funds. Our market exposure is about 50% (in the hedge funds). We don't think it's right to take in money and get paid a 1.5% management fee and 20% of the profits if 50% of the money is invested. Until there's more volatility where we can raise the net market exposure, we are not taking in money. We are no longer doing traditional structured collateralized bond obligations or collateralized debt obligations.
We do have capacity available in two products: middle-market strategies and a hedge fund that invests in higher quality bank debt and high-yield bonds using a committed line of flexible financing. The latter is our way of capturing volatility in higher quality assets. It's the convergence between hedge funds and CDOs. It's a unique strategy.
Q Are you planning to start an ERISA-only hedge fund?
Mr. Wagner: We're getting close. We've had significant, serious interest from a lot of investors. Our goal is to launch it sometime in the first quarter and then see how the market reacts to it. You aren't going to get a new client to invest in a new idea. It's going to be the friends, family and clients closest to the firm that will go in first.