Late last summer, Whitney & Co. was on top of the world. More than a decade removed from a near-fatal investment in Prime Computer Inc., the venerable firm had just launched its fifth private equity vehicle, opened a handful of overseas offices and signed on a sprawling support staff. It had also hired a pair of top-tier investors to help numb some of the pain associated with a recent rash of rapid-fire resignations.
As if to demonstrate his firm’s recovered elevation, Whitney CEO Peter Castleman posed atop a stone wall for a magazine photo snapped from ground level. Casually dressed with his hands on his hips and a toothy grin across his face, Castleman looked confident that his firm was prepared to compete with such global asset managers as The Carlyle Group. “People try to put limits on themselves,” he said in an accompanying article. “I don’t accept them.”
Not even a year after saying those words, however, both Castleman and Whitney seem to have learned to accept limits after all.
Indeed, domestic investing now rules the Stamford, Conn.-based firm’s private equity unit, as poor economic conditions and investor unease all but fossilized Whitney’s global expansion plans. Also gone are the two new investors and most of the analysts and internal fund raisers that had been hired to help streamline a more diversified and capital-intensive investment strategy. Finally, the much-ballyhooed Whitney V fund fell $900 million short of its initial $2 billion target capitalization.
Whitney’s woes appear to be largely self-inflicted, a result of overzealous ambitions.
“Most firms only hire up when they have raised a fund or closed a substantial portion of it or have actually started the strategy they are supposedly doing,” said an executive recruiter familiar with the situation. “Whitney was unusual in terms of the scope in which it anticipatorily hired… [and] in terms of the pace at which it expanded overseas.”
Errors In Judgement
Whitney declined comment for this story, but in other venues has stated it views the situation mainly as a media creation. In a confidential memo to limited partners dated June 27, the firm bashed media reports of internal strife as irresponsible examples of sound-byte journalism.
“[The news] being reported by the press is focused primarily on people who are non-core to our U.S. growth capital investing, had no track record with us or were asked by us to move on,” the letter said.
Whitney also argued that reporters had been so set on finding scandal that they had glossed over Whitney’s ability to close on its largest fund to date (Whitney IV came in at $1 billion), and that internal reorganization indicated prudence as opposed to weakness.
Some limited partners in Whitney V tend to agree, and even go so far as to argue that the firm may eventually be viewed as a private equity industry trendsetter.
“Castleman was smart enough to know that either he was right and everyone else was wrong, or that he had to change directions,” said one institutional investor. “There are some other people at some other firms that just haven’t come to that level of understanding yet, but they’ll have to.”
The fund manager was quick to add, however, that his group might have committed more capital to Whitney V if Castleman had never tried to overreach in the first place, a sentiment shared by many institutional investors.
“The past returns were attractive enough for us to invest, but I just wasn’t convinced the new approach would prove as successful,” said a private equity fund adviser who had seen the book but declined to recommend it to his clients.
Indeed, Whitney’s ability to close on $1.1 billion seems to have been in spite of its strategy, rather than because of it.
In the original offering memorandum for Whitney V, investors were told that up to 40% of the new vehicle’s capital would be used to make investments outside of the U.S. While such a geographically hybrid structure has been gaining popularity among stateside firms – such as Benchmark Capital and Summit Partners – potential buyers appeared concerned that Whitney did not seem to be adding the necessary professional muscle to its overseas endeavors. Instead, it acted in land-grab fashion, using extra financial incentives to fill empty seats as quickly as possible. “If I was running a U.S. firm and decided to open a London office, I’d hire a real name guy to run things over there and staff up around him,” said one source close to Whitney. “They just basically hired people without much private equity background, made them managing directors and tried to grow the business from there. But it backfired because the economy changed and because those people had very little [industry] credibility.”
Also denting Whitney’s credibility among private equity investors was its decision to mirror Carlyle Group in hiring an internal fund-raising team that would, in effect, act as the go-between for Whitney and its limited partners. The move sparked immediate outrage among some veteran LPs used to having direct access to the investment team itself.
“If I want to discuss something about the fund, I talk to Castleman,” groused one investor. “The other people were nice and all, but didn’t know much about the actual investment process. It was a flawed idea.”
Today, Whitney has retained a small percentage of its support staff, but mostly to work on its private debt, hedge fund activities and structured product activities. Most of the big-name fund-raising pros – like Barry Hines, Mark Murphy and Carla Skodinski– are no longer with the firm.
While investors applauded many of the departures when informed of the news during a March LP meeting, the response was not so enthusiastic for the revelation that Managing Directors William Dawson and Joseph McCullen were also leaving Whitney. The pair of proverbial rainmakers had been hired in 2000 to help fill the void left by the departures of Michael Brooks (now with Venrock Associates), Peter Huff (now with Austin Ventures) and Jim Matthews (now with Welsh, Carson, Anderson & Stowe).
“Any time you lose guys who produce, it’s a problem and some people almost didn’t do the fund because [they left]. It seemed, though, that Whitney helped calm folks down by bringing in [Dawson],” said a source.
Dawson, a leveraged buyout pro who came to Whitney last year after a 14-year stint with DLJ Merchant Banking, left to take a position with New York-based Wellspring Capital Management, where he is said to be preparing to raise a new fund.
McCullen – his affinity for early-stage deals was set to complement Dawson’s later-stage focus – was a veteran communications investor also hired in 2000 to, among other things, open a new Boston office for Whitney. McCullen’s relationship with the firm became so tumultuous, however, that his name wasn’t even listed on the Whitney V offering memorandum. The Boston location was recently removed from Whitney’s Web site.
Thus far, no other big names have left the firm, but rumors continue to swirl that another departure is just a matter of time.
“I don’t think the bleeding is necessarily over yet,” said a source. “The Three Amigos [Castleman, William Laverack and Michael Stone] aren’t going anywhere but some others have said privately they’re unhappy with the way things turned out.”
Another source, who invested in Whitney V, said he knew internal strife still existed, but that he was sure the returns would be there in the end, which he said is all that really mattered to him at the end of the day.
Indeed, Whitney’s private equity unit has officially returned to its core competency of making domestic investments in growth-stage (i.e. all stages) companies; a core competency which has historically produced strong returns.
“[Whitney’s] strategy ran head-on into a difficult market that forced them to reassess, and now they’re going back to where they were before, which is a core VC fund with some other diversified assets around it,” said a rival investor.
The issue of Whitney’s diversified asset activities has been a source of much speculation. Some market watchers said that such efforts would slow down following the decision to dismantle the fund-raising group, but everything still seems to be in place. For example, the firm is preparing to close on its second mezzanine fund, and both the U.S. and Japan-based hedge fund operations are still in place. Moreover, Whitney has even held on to some of its Japan-based private equity pros to manage the existing portfolio despite the promise of no new Japanese investing.
“They are keeping a bit of the Carlyle-look alive, but they really have just slowed everything down,” said a source familiar with the firm. “I think the next few months will be key for them because they’ve taken a pretty bad PR hit within the industry. They need to regain their footing and remind people about what made them such a successful firm in the first place.”
And, if Castleman and crew can pull it off, it might prove to be the second time the group has successfully saved Whitney from itself.