Friday, August 16, 2013

Acquiring Baubles: When Money Managers Get Really Rich

Acquiring Baubles:  When Money Managers Get Really Rich

How do you know when a money manager has become bored and less interested in looking after his clients’ portfolios?  As an investor, you want your money manager to focus on managing your assets.   However, as a manager becomes successful, his growing wealth can become a distraction.  After acquiring a large primary residence, money managers tend to want a series of vacation homes.  Traveling between these residences on commercial aircraft becomes a hassle, so the money manager first buys a share in a private plan, such as Net Jets, and then acquires his own plane.  Eventually, he becomes tired of the chauffeured ride to and from the office, so he purchases a helicopter.  When a collection of homes is no longer satisfying, the successful money manager has to have a yacht.  These assets -- homes, aircraft, and ships -- don’t manage themselves.  The big time money manager soon has a huge personal staff of gardeners, housekeepers, and pilots.  Your portfolio commands less and less attention from the people earning the mega-dollars and is handed off to more junior members of staff.
 
Responsibilities (2009)
The sports franchise is the latest bauble competing for the attention of money managers.  Yesterday we learned that Joshua Harris, a co-founder of Apollo Global Management, and David S. Blitzer, the head of tactical opportunities for the Blackstone Group, have acquired the New Jersey Devils NHL franchise.  Mssrs. Harris and Blitzer already own the Philadelphia 76ers of the NBA.  The Boston Celtics, Detroit Pistons, Pittsburgh Penguins, and Tampa Bay Lightening count money managers as owners.  Every time a sports franchise comes up for bidding, money managers seem to be on the short list of potential buyers.   Not just any money manager can acquire a sports franchise.  It takes the kind of fees generated by alternative investments to come up with the hundred of millions of dollars needed to buy a sports team.

 As an investor, I used to ask prospective money managers a bunch of questions about their vacations, hobbies, and outside interests.    I was interested in seeing if the manager had a healthy balance between his investment interests and private life.  If the manager talked endlessly about his latest safari, addition to his beach home, or refitting of his yacht, warning lights started to flash on my due diligence checklist.  Either my money was not being properly managed, or I was talking to the wrong person.  And if the portfolio manager was generating the kind of wealth that enabled him to acquire all sorts of distractions, the people doing the real work at the firm were probably not getting enough of the firm’s economics.  Acquiring sports franchises takes these concerns to a new level.


I’m sure the public employees in New Jersey are thrilled to know that their fees have helped to finance Mr. Blitzer’s acquisition of the New Jersey Devils.  Over the years, the New Jersey public pensions have made huge commitments to alternative managers, including Blackstone, and yet the state’s pension deficit has continued to grow.  New Jersey has a $2.5 billion relationship with Blackstone, including a huge commitment that focuses specifically on Mr. Blitzer’s tactical opportunities fund.  When Mr. Blitzer isn’t tinkering with the 76ers or Devils, perhaps he’ll have a little time to look after the interests of his pension client in New Jersey.

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