Howard Gellis: Adding Zeal to Mezzanine –

Buyout professionals are often thought of as business piranhas, guys who buy and sell mom-and-pops, driven by greed. Though that stereotype may not be far off when you consider the industry’s roots, the business has actually changed a great deal. And players like Howard Gellis, senior managing director and co-founder of the Blackstone Mezzanine Group, are proving that for some, it’s really about enjoying your work.

No stranger to hard work even without a big payoff, Gellis spent his summers between the ages of 13 and 25 working in his father’s store. There, the monetary reward was meager, to say the least. Gellis started at $1.10/hour and finally worked his way up to $4.00/hour – years later. But the practical rewards are still paying off.

“My father taught me about hard work, about salesmanship, about humility, the value of a dollar and about charity . . . having a sense of humor about things and caring about people,” says Gellis.He describes these lessons as a linchpin behind his approach to life and work.

The idea of finding a place for himself in finance came to Gellis at an early age, in large part due to his father’s influence. Gellis’s father taught him about business. And just as importantly, he taught him work ethics. The senior Gellis, a Lithuanian immigrant, moved to the U.S. with his five siblings and widowed father, and became a green grocer in Bridgeport, Conn. His hard work and business style are ingrained in the younger Gellis and have carried into his private equity career.

“I have a reputation among our clients, among the buyout community, as being a person of integrity, who is straight with them. I don’t always tell them what they want to hear, but they know if they ask me a question, I’ll give them a straight answer,” he says. “We’re very direct and I think that approach has really stood me very well.”

Besides instilling a work ethic in his son, the senior Gellis also introduced his son to the finance markets. When young Gellis came home from school for lunch each day, his father would be talking to his broker and trading stocks on his lunch break. “I remember telling my dad when I was 11 or 12 years old that I wanted to be a stock broker when I grow up,” says Gellis. “And he said to me, Well if that’s what you want to be, the best school in the world is the Wharton School of Finance and Commerce, and if you can get in there, I promise you the money will be there for you to go.'”

In 1975 Gellis earned his undergraduate degree from the Wharton School, and he was on the fast track to his career in finance. After a two-year stint in the pension fund department of E.I. duPont de Nemours & Co., Gellis returned to school and earned his MBA from Harvard University.

A Blessing in Disguise

In business school, the leasing business, which incorporated both finance and marketing, piqued Gellis’ interest, and his first job out of Harvard met that interest. Gary Wendt, who was destined to become president of GE Credit Corp. (GECC), recruited Gellis to start off in GE’s leasing business in 1979. Then in 1983, just as the buyout business was becoming the talk of the town with the IPO of Gibson Greeting Card Co., Gellis was given the opportunity to run GE Capital’s leveraged buyout business in Dallas. Initially Gellis was unsure if taking the Dallas office was the soundest decision. The preceding three managers that attempted to run the office had failed and been fired. If Gellis failed, the Dallas office would close permanently, but he would have the opportunity to return to Connecticut.

“I remember asking Gary Wendt, Why on earth would I take this job? You’ve got to be out of you mind,'” Gellis recalls. “[Wendt replied], This is the best job in this whole company. If you don’t take it, I’m going to take it! . . . If you can’t turn this thing around in a year, we’re bringing you home . . . we’ll close the office, no harm done. If you turn it around, you’re the biggest hero on earth.'”

So, Gellis headed off to Dallas, where the buyout business had been lagging a bit, and launched GE’s LBO business there as well as his own LBO career. Gellis’ group was there when Dallas was putting itself on the buyout map, playing a role in the first two buyouts by the predecessor firm to Hicks, Muse, Tate & Furst and Haas, Wheat & Partners. In just over two years, he took GE’s portfolio from $25 million to more than $500 million. While running the Dallas office, Gellis was first exposed to the mezzanine business, which later became his passion, learning from his colleagues Robert Koe, Gellis’ first boss at GE; Larry Bossidy, who later replaced Koe; and Michael Dabney, who later ran the private equity business at Bear Stearns.

Moving up the GE ladder, Gellis moved to the Chicago office to run the commercial lending and buyout activities for the Western two-thirds of the U.S. At age 31, he was made one of approximately 15 general managers and, alongside Dennis Naden who is currently president of GECC was made the youngest vice president in the company history.

In 1987 Gellis moved to New York to join the corporate finance group of Equitable Capital Management Corp., the private investment arm of Equitable Life, bringing with him a couple of guys from GE to be his deal team. Then in 1993, Alliance Capital Management absorbed Equitable Capital, and the mezzanine and institutional marketing group that Gellis led slipped on the firm’s priority list.

In 1994, recruited by Max Chapman, then-chairman of Nomura Holding America Inc., Gellis decided to leave Equitable and start a new business with Nomura. Gellis and Sal Gentile – who moved with Gellis from Equitable and to this day is still his partner at Blackstone launched and ran Nomura’s leveraged capital group (LCG) for five years.

But when Nomura was closing the doors on much of its principal investing businesses due to some trouble in the real estate sector, Gellis decided to lead his team to safety rather than go down with the ship. So he made the CEO of Nomura, Atsushi Yoshikawa, an offer “to leave with our team, start our own business, take his portfolio with us, run it for him and help him manage off the portfolio while we repotted ourselves and started things over,” says Gellis. “In the midst of working those details out with him, I was approached by Blackstone about perhaps taking [the LCG] business and bringing it here to Blackstone.”

In April 1999, Gellis and his team moved into The Blackstone Group. Within five months, the group launched Blackstone Mezzanine Partners. The fund held a first close in October and by April 2000 held a final closing on $1.1 billion.

The Happy Medium

After 18 years of work revolving around the mezzanine business, some people may have a hankering for a new area of private equity work, but Gellis is more than happy to stay in his niche. Of the other roles in private equity, Gellis says he would find being a senior lender boring and while he wouldn’t mind being an equity investor, he really “gets a kick out of being a mezzanine lender.”

In Gellis’ view, the other roles that make up a buyout deal don’t have the attraction of the mezzanine lender. A senior lender has no upside in its role. “There’s nothing but downside for them. They put their money out, and they can’t wait till the day they get it back,” he says.

The equity investors, at the bottom of the capital structure, are just the opposite. “That’s Mr. Upside. That’s the guy with the rose-colored glasses,” he says. “They’re very much focused on the upside, the growth, the potential, and they’ve got a pretty high tolerance for risk because losses aren’t the end of the world for them.”

For Gellis, the middle of the capital structure is the place to be. “I lend money, so from that standpoint I’m a lender like a bank. I really can’t afford to take a whole lot of losses because my upside is not so great that I can afford to have 30% to 40% losses in my portfolio,” he explains. “On the same hand, if all I collect is a coupon, I’m not making my investors very happy . . . So I’ve got to be a sort of fulcrum in this transaction that balances the fear of losing capital versus the upside potential in the transaction. I’ve got to live in both worlds.”

The complexity of that role is what intrigues Gellis. The way he speaks of mezzanine financing sounds like the same rush that one gets from bungee jumping. He talks of the challenge and “the thrill of being a mezzanine lender.”

Of course success always makes life a little easier to bear. And Gellis is quick to credit those that have guided him along the way. Topping the list is his father, but he also recognizes Jim Fishel, a strategic planner from his early days at GE Capital. “He was a smart guy who’s seen it all, and Jim worked very hard to teach the young guys in the business what a deal was all about.”

From Fishel, Gellis learned to step back from a transaction and ask all the right questions in order to understand what is really happening and to identify each party’s motis operandi.

“He had the greatest impression on me in terms of my credit judgment, which I think – besides the personal skills my dad taught me is probably the number one effect on my personal career,” says Gellis.

Wickham Skinner, a professor Gellis had at Harvard, also offered some words of wisdom that Gellis still uses to this day. Gellis jokes he has probably repeated the most profound of them to his team at least 10 times. The message Gellis relays from Skinner is: “[When] you go out in the business world, if you make the right decision more than 50% of the time, then you’re a genius. You’re not going to do the right thing more than 50% of the time. The key to your success is not making the right decision, it’s managing the decision you make.”

And in his experience, Gellis has found the best management teams he worked with displayed this ability.

Though passionate about being a mezzanine player, Gellis also has a passion for another game – baseball. A lifetime fan of the New York Yankees, he played baseball all through his childhood and still likes to watch the Yankees play on his off time. At the time of this interview, Gellis was eagerly awaiting 61*, Billy Crystal‘s movie about Mickey Mantle and Roger Maris.

Following his parents’ lead, Gellis also is very involved in his temple in South Orange, N.J., as a member of the board of trustees and serving its foundation. “It just seemed very natural for me to give some of my time to do that because I belive you’ve got to give something back to society,” he says.

When not working at Blackstone or with his congregation, Gellis likes to play golf with his wife, Joan, who he says is a very good golfer that inspires him to become better.

He and his wife are also rearing the next generation. The older of his two sons is off to college this fall to major in math, while the younger one has his eye on the same career path as dad the Wharton School, Harvard and then the mezzanine business.

Get ready, Blackstone.

Fact Sheet

Howard Gellis

senior managing director,

Blackstone Mezzanine Group

Born: June 25, 1953, Bridgeport, CT

Education: B.S.E. (finance), University of Pennsylvania Wharton School, 1975; M.B.A., Harvard Business School, 1979

Career Path: E.I. duPont de Nemours & Co. 1975 – 1977; GE Credit Corp. 1979 – 1987; Alliance Capital Management (and predecessor Equitable Capital Management Corp.) 1987 – 1994; Nomura Holding America Inc. 1994 – 1999; The Blackstone Group 1999 – Present

Last Book Read: When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein

Favorite Book: Burr by Gore Vidal

Favorite Movie: Braveheart

Last Movie Seen: Hannibal

Favorite Food: Fried chicken livers

Favorite Web Site: ragingbull.lycos.com

Favorite Travel Destination: Italy

Favorite Sports Team: New York Yankees

Favorite Musician: Jon Anderson of the band Yes

Wheels: Porsche Boxter

Pet Peeve: Cold calls from stock brokers

Most Admired Historical Figure: Abraham Lincoln

Favorite Quote: “The true measure of a man is how he treats someone who can do him absolutely no good.” – Samuel Johnson

Investment Philosophy: “Protect your downside risk while not precluding your upside potential.”