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LEADING THE NEOBANK PACK

IN 20 YEARS, THESE VENTURE CAPITAL-BACKED STARTUPS COULD DOMINATE CONSUMER
BANKING, BUT THEY’LL FACE PLENTY OF COMPETITION ALONG THE WAY. FINTECH COMPANIES
THAT ORIGINALLY OFFERED INVESTING ARE RUSHING TO ADD BANK SERVICES, WHILE THE FALLING
COST OF LAUNCHING A NEOBANK IS ATTRACTING AN ARMY OF ENTIRELY NEW ENTRANTS.

VALUATION FUNDING USERS YEAR BANKING FEATURES
98 COMPANY (BIL) RAISED (MIL) (MIL) LOCATION FOUNDED (IN ADDITION TO CHECKING ACCOUNTS)
Nubank $10.4 $818 15.0 São Paulo 2013 Savings accounts, personal loans, credit cards
2011
SoFi $4.3 $2,300 8.5 San Francisco 2011 Student loans, personal loans, mortgages,
SoFi
$2,300
Student loans, personal loans, mortgages,
8.5
San Francisco
$4.3
0
savings accounts, investing, insurance
5 savings accounts, investing, insurance

H N26 $3.5 $670 3.5 Berlin 2013 Personal loans, money transfers, insurance,
C overdraft protection

E
$2.6
T Monzo $2.6 $400 3.3 London 2015 Savings accounts, personal loans, overdraft
$400
London
Savings accounts, personal loans, overdraft
2015
3.3
Monzo
N protection
protection
I
F
Revolut $1.7 $345 8.0 London 2015 Money transfers, investing, insurance
•
n
v
i
g
a
3.3
s

S
San Francisco
2012
$1.5
Chime $1.5 $307 3.3 11 S a n F r a n c i s c o 2 0 1 2 Savings accounts, money transfers, ,
a
Chime
$307
c
t
r
a
e
y

e
r
s
n
s
f
n
t
u
c
o
s
o
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,

D


overdraft protection
N overdraft protection
E
R Atom Bank $1.3 $372 0.1 Durham, U.K. 2014 Savings accounts, mortgages
T
2016

Overdraft protection
$1.0
Angeles
Los
Dave
$186

4.5
Dave $1.0 $186 4.5 Los Angeles 2016 Overdraft protection
E
H MoneyLion $0.7 $200 5.7 New York 2013 Personal loans, investing, credit monitoring
T
1 FORBES ESTIMATE BASED ON 5 MILLION TOTAL ACCOUNTS AND AN AVERAGE OF 1.5 ACCOUNTS PER USER. SOURCES: THE COMPANIES; PITCHBOOK; CB INSIGHTS.
ment banking, where he remained for the next decade. days. Customers were unable to see their balances, and
From an insider’s vantage point, he saw that traditional some were intermittently unable to use their debit cards.
banks were excruciatingly slow to respond to the preferenc- Chime blamed the failure on a partner, Galileo Financial
es of their customers and exploit the power of smartphones. Technologies, a platform used by many fintech startups to

That, plus a never-ending series of bank scandals, convinced process transactions.
him that there was an opening for a digital “private banker.”
In 2013 he walked away from his near-seven-figure salary to n a warm fall day Tim Spence speed-

start MoneyLion. O   walks his 6-foot-3 frame through the
Choubey raised $1 million in seed funding and started out towering, 31-story Cincinnati head-
offering free credit scores and micro-loans. But he struggled quarters of his employer, Fifth Third, a

to raise more money. Forty venture investors turned him 161-year-old regional bank with $171 bil-
down, deeming his vision impractical and unfocused. “I was lion in assets. Clad in a plaid sport jacket with no tie, Spen-
laughed out of a lot of VC rooms in our early days,” he recalls. ce doesn’t look like a traditional banker. And he’s not.
While Choubey banged unsuccessfully on VC doors, Mon- A Colgate University English literature and economics
eyLion putt-putted along, bringing in a little revenue from major, Spence, now 40, spent the fi rst seven years of his
loan interest and credit card ads and collecting a bunch of career at digital advertising startups. He then moved into
data on consumer behavior. Finally, in 2016, he persuaded consulting at Oliver Wyman in New York, advising banks
Edison Partners to lead a $23 million investment. That en- on digital transformation. In 2015, Fifth Third lured him
abled MoneyLion to add a robo-advisor service allowing to Ohio as its chief strategy offi cer and then expanded his
users to invest as little as $50 in portfolios of stocks and mandate. He now also oversees consumer banking and pay-
bonds. In 2018, it added a free checking account and debit ments, putting him in charge of $3 billion worth of Fifth
card issued through Iowa-based Lincoln Savings Bank. Third’s $6.9 billion in revenue. Last year, he brought home
Managing rapid growth, while striving to keep costs low, $3 million in total compensation, making him the bank’s
has proved tricky. MoneyLion was hit with a deluge of Better fourth-highest-paid executive.
Business Bureau complaints over the past spring and sum- Fifth Third has 1,143 branches, but today Spence is fo-
mer. Some customers experienced long delays transferring cused on Dobot, a mobile app the bank acquired in 2018 and
their money into or out of MoneyLion accounts and, when relaunched this year. Dobot helps users set personalized sav-
they reached out for help, got only computer-generated re- ings goals and automatically shifts money from checking to

sponses. Choubey says the software glitches have been fixed, savings accounts. “We reached 80,000 downloads in a mat-
and he has bumped up the number of customer-service reps ter of six months, without having to spend hardly anything
from 140 to 230. on marketing,” he says.
Other neobanks have had operational growing pains too. Scooping up new products is one part of a three-pronged
In October, San Francisco-based Chime, with 5 million ac- “buy-partner-build” strategy that Spence has helped devise
counts, had technical problems that stretched over three to combat the neobank challenge. Partnering means both
F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

The 33 rd



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• Welcome & Farewell Receptions – Enjoy the beautiful and enriching voyages.

camaraderie of other like-minded investors — STEVE FORBES




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100



0
5

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F

•

D
N
E
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E
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FOMO
Tim Spence, Fifth Third’s chief strategist, in the regional bank’s downtown Cincinnati headquarters. Most of his neobank competitors are losing money, but
“the lesson . . . learned from Facebook and Amazon and Google . . . is that the internet is amenable to a winner-take-all market structure.”


investing in fintechs and funding loans generated by the shown that they can take over primary banking,” he says.
newcomers. Fifth Third has a broad deal with Morris’ QED, He also argues that having physical retail branches is still
which gives it a chance to invest in the startups the VC firm important for building long-term relationships with custom-
backs. One of Fifth Third’s earliest QED investments was ers. In a recent Javelin survey of 11,500 consumers, an equal
in GreenSky, the Atlanta-based fintech that generates home number rated online capabilities and branch convenience as
remodeling loans (some funded by Fifth Third) through a the most important factors when deciding whether to stick
network of general contractors. with a bank.
The best of these partnerships provide Fifth Third ac- Fifth Third has been reducing its overall number of
cess to younger borrowers, particularly those with high branches an average of 3% a year, but it’s opening new ones
incomes. In 2018, it led a $50 million investment in New designed to be Millennial-friendly. These outlets are just two
York-based CommonBond, which offers student-loan refi- thirds the size of traditional branches. Instead of snaking
nancing to graduates at competitive interest rates. Similarly, teller lines, there are service bars and meeting areas with
Fifth Third has invested in two San Francisco-based start- couches. Bankers armed with tablets greet customers at the
ups: Lendeavor, an online platform that makes big loans to door—Apple Store-style.
young dentists opening new private practices, and ApplePie That raises the question of whether any of the neobanks
Capital, which lends money to fast-food franchisees. will be so successful that they’ll eventually open physical
“The thing I’m most envious of, when it comes to the ven- outposts, the way internet retailers Warby Parker, Casper
ture-backed startups that we compete with, is the quality of and, of course, Amazon have done. After all, it’s happened
talent they’re able to bring in. It’s really remarkable,” Spence before. Capital One pioneered the use of big data to sell
says. credit cards in the early 1990s, making it one of the first suc- FRANCO VOGT FOR FORBES
But while Spence envies them sometimes and partners cessful fintechs. But in 2005 it started acquiring traditional
where he can, he isn’t convinced the neobanks will make banks, and today it’s the nation’s tenth-largest bank, with
big inroads into traditional banks’ turf. “None of them have $379 billion in assets and 480 branches.


F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9



102



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Emerging power duo: Behdad
Eghbali and José E. Feliciano
of Clearlake Capital,
which made $800 million
on its recent sale of Sage
Automotive alone.








F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

THE FORBES INVESTIGATION







P R I VA T E E Q U I T Y ’ S




N E W B I L L I O N A I R E 103




M A C H I N E

































































AS CALLS FOR TAXES ON THE SUPERRICH GROW
LOUDER, WALL STREET’S SMARTEST DEALMAKERS HAVE
QUIETLY DISCOVERED A NEW WAY TO UNLOCK VALUE

AND CIRCUMVENT TAXES. IT’S MINTING BUYOUT
BILLIONAIRES BY THE DOZEN.









BY NATHAN VARDI AND ANTOINE GARA PHOTOGRAPH BY ROBERT GALLAGHER FOR FORBES


N O V E M B E R 3 0 , 2 0 1 9 F O R B E S . C O M

ing increasing GP commitments. Many also want
to invest more in their own deals, and this is a
very efficient mechanism as the proceeds raised
usually are funded over time matching the needs,
and there are some tax advantages,” says Ever-
core’s Saul Goodman, the investment banker on
most of the general-partnership-stake (GP-stake)
deals.
Private equity firms, normally secretive about
104 their internal economics, are loath to discuss
these sales. Gores declined to comment, as did
pretty much all his private equity tycoon peers.
N
O However, based on months of reporting and doz-
I ens of interviews with insiders and investors in
A T
G these funds, Forbes has been able to identify 13
I new billionaires who have unlocked fortunes by
T
S
E this financial engineering. Ever heard of Steven
V B. Klinsky, Egon Durban, Mike Bingle or Scott
N → When the Detroit Pistons
I Kapnick? All are part of a new guard of private

E
H equity titans who are taking advantage of a world
opened their 2017-2018 awash in cheap capital and tax advantages and
T
driving a boom in the buyout business.
season to a sellout crowd private equity—a business predicated on raising
As investment banks and hedge funds struggle,

and a big welcome from capital subject to long-term lockups to invest in
assets using large amounts of leverage—is enjoy-
ing go-go times. The decade-long bull market has
rapper Eminem, the team’s helped the group log average annual returns of

13.69% over the 15 years ending March 31, 2019,
owner, billionaire Tom according to Cambridge Associates, compared
with 8.57% for the S&P 500. Last year alone, PE
Gores, beamed courtside. deals amounted to some $1.4 trillion, and in the
U.S., private equity firms now own more than
8,000 companies, compared with 4,000 in 2006.
Yes, the gleaming new $863 million downtown arena was worth cel- Down the road from Gores’ palatial offices, in
ebrating, but Gores was finalizing the deal of his lifetime, a ten-digit Santa Monica, California, José E. Feliciano and
payout from his Beverly Hills buyout firm, Platinum Equity. Behdad Eghbali operate Clearlake Capital, a bou-
The deal was done quietly, without fanfare or a press release. Gores tique firm with a relatively modest $10 billion
forked over an estimated 15% of his stake in Platinum to another firm, in assets. Feliciano grew up in Bayamón, Puerto
Dyal Capital Partners, which will garner $1 billion for him over four Rico, a city known for fried pork rinds, before at-
years. In doing so, Gores, who’s now worth $5.6 billion after the trans- tending Princeton. Born in Iran, Eghbali arrived
action, scored a huge personal windfall, raised the valuation of his in the U.S. in 1986 at age 10 on a tourist visa with
firm, which he still controls—and avoided taxes. his parents, who wanted to avoid his conscrip-
He’s hardly alone. In the last four years, no tion in the Iran-Iraq War. After graduating from
fewer than 60 private equity firms have followed college, both Feliciano and Eghbali paid their
the same playbook, selling slivers of their general dues toiling at old-guard private equity firms like
partnerships, according to PitchBook, frequently TPG Capital. Then in 2006, they teamed up to
at eye-popping valuations. More than $20 bil- form Clearlake Capital.
lion is being raised this year alone for more By all accounts, their firm, which tends to buy
such deals, half by Dyal, a unit of the large New little-known software, industrial and consumer
York asset manager Neuberger Berman, the rest products companies, has been a roaring success.
by others, including units of Blackstone Group, Clearlake’s 2012 fund, for example, has posted an
Goldman Sachs and Jefferies. Secretary of Educa- annual net internal rate of return of 42.7%. So
tion Betsy DeVos and her husband, Richard, are last year, as the GP-stakes market was exploding,
getting into this game, out of their family office. a bidding war heated up for Clearlake. Feliciano
Former Florida governor Jeb Bush has teamed up and Eghbali got Dyal and Goldman to team up
with Bahrain’s Investcorp to invest in private eq- for a slice that valued Clearlake at a rich $4.2 bil-
uity general partnerships, as well. lion, making Feliciano, 46, and Eghbali, 43, two
“Some firms have grown rapidly and are see- of the youngest billionaires in private equity.


F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

S E P T E M B E R 1 8 – 1 9 , 2 0 1 9 | # F O R B E S A G T E C H
The Forbes AgTech Summit ventured back to Indianapolis for our 2nd annual Midwest signature event! This summit brought
together more than 400 of the smartest minds in technology and global agriculture to tackle the world’s most critical challenges



to our food supply. The program was filled with industry experts who offered invaluable insights on topics such as animal health,
protecting our fields from potential weather disasters, regenerative ag and growing the next generation of ag leaders. Many also


experienced field tours at Beck’s Hybrids and had the chance to demo new technologies first hand at our Innovation Showcase.

We also hosted the Forbes/THRIVE Midwest Challenge – an opportunity for leading startups to pitch onstage for a chance to
win a significant investment by the THRIVE Accelerator. Tom Bayer, Partner In Charge at Sikich LLP left saying, “The Forbes and

AgriNovus teams have vision about the current and future Food and Ag trends that makes this a ‘must attend’ for those that want
to thrive and survive in this important space going forward. You will network with and hear from the visionaries of the future.” Stay
plugged into the ForbesLive.com site for future event updates!







— HOST PARTNER — — PRESENTED BY —










— FOUNDING PARTNERS —
— PARTNER — — SUPPORTING SPONSORS — — BUSINESS LEADER —

LEGAL NOTICE The business reasons for these
STATEMENT OF OWNERSHIP, stake deals are abundant. Cash is
MANAGEMENT AND CIRCULATION
(Required by 39 U.S.C. 3685). pouring into private equity. When
1. Title of publication: Forbes. new funds are formed, institu-
2. Publication No. 00156914.
3. Date of Filing: October 1, 2019. tions generally insist that firms
4. Issue Frequency: Forbes is published monthly, except January and July. show skin in the game by putting
5. Number of Issues Published Annually: 10.
6. Annual subscription price: $34.95. their own money into funds. How-
7. Complete Mailing Address of Known Office of Publication: 499 Washington Blvd., Jersey City, NJ 07310. ever, liquidity can be an issue,
8. Complete Mailing Address of Headquarters or General Business Office of Publisher:
106 499 Washington Blvd., Jersey City, NJ 07310. especially for younger firms.
9. Full Names and Complete Mailing Addresses of Publisher, Editor and Managing Editor: Randall Lane These GP-stake sales free up cash,
(Chief Content Officer), 499 Washington Blvd., Jersey City, NJ 07310. Michael Noer (Executive Editor),
499 Washington Blvd., Jersey City, NJ 07310. Luisa Kroll (Managing Editor), 499 Washington Blvd., provide permanent capital and
N Jersey City, NJ 07310.
O 10. Owner: This publication is owned by Forbes LLC, 499 Washington Blvd., Jersey City, NJ 07310, which is can help solve complex succession
I owned by Forbes Media LLC, 499 Washington Blvd., Jersey City, NJ 07310, which is owned by Highlander issues.
A T Management LLC and Forbes Global Holdings, Inc. Highlander Management LLC is owned by SBKTM
G Holdings, Inc., 101 Avenue of the Americas, Suite 842, New York, NY 10013. Forbes Global Holdings, Inc. is But there is another factor driv-
I owned by Integrated Whale Media Investments, Inc., No. 9 Queen’s Road Central, Room 2401, 24/F Hong Kong. ing these deals: skirting Uncle
T
S 11. Known bondholders, mortgagees and other security holders owning or holding 1 percent or more of
E total amount of bonds, mortgages or other securities: None. Sam. Private equity already en-
V 12. Not applicable. joys the most absurd tax break in
N 13. Publication Title: Forbes.
I America—“carried interest,” which
14. Issue date for circulation data below: April 30, 2019.
E 15. Extent and nature of circulation:
H Average No. No. Copies allows these big fund managers
T
Copies of Single to pay capital gains taxes, rather
Each Issue Issue than income taxes, on their profit
During Published
bonuses, on the idea that their in-
12 Months Nearest to tellectual contributions should be
Filing Date
A. Total Number of Copies treated equally to the profits made
(Net Press Run) 761,774 751,615 by their investors. Carried inter-
B. Paid Circulation (By Mail and Outside the Mail)
(1) Mailed Outside-County Paid Subscriptions Stated on est has been a lightning rod with
PS Form 3541 (Include paid distribution above nominal rate, politicians for years. In 2016 even
advertiser’s proof copies and exchange copies) 612,374 633,332
(2) Mailed In-County Paid Subscriptions Stated on Donald Trump decried carried in-
PS Form 3541. (Include paid distribution above nominal rate,
advertiser’s proof copies and exchange copies) 0 0 terest, which basically lets private
equity executives pay a lower tax
(3) Paid Distribution Outside the Mails Including Sales
Through Dealers and Carriers, Street Vendors, Counter Sales rate than many wage earners. But
and Other Paid Distribution Outside USPS® 28,410 20,653 Washington has yet to curtail its
(4) Paid Distribution by Other Classes of Mail
through the USPS (e.g. First-Class Mail®) 0 0 widespread use (Blackstone’s Ste-
phen Schwarzman famously com-
C. Total Paid Distribution (Sum of 15B (1), (2), (3) and (4)) 640,784 653,985
D. Free or Nominal Rate Distribution pared President Obama’s effort
(By Mail and Outside the Mail) to eliminate carried interest to
(1) Free or Nominal Rate Outside-County
Copies Included on PS Form 3541 54,496 46,012 Hitler’s invasion of Poland), and it
(2) Free or Nominal Rate In-County again survived the most recent tax
Copies Included on PS Form 3541 0 0
(3) Free or Nominal Rate Copies Mailed at Other reform bill.
Classes through the USPS (e.g. First-Class Mail) 0 0 But these new deals go further.
(4) Free or Nominal Rate Distribution Outside the Mail
(Carriers or other means) 7,531 5,203 They effectively transform the 2%
E. Total Free or Nominal Rate Distribution (Sum of 15D (1), (2) management fees (separate from
(3) and (4)) 62,027 51,215
F. Total Distribution the standard 20% profit participa-
(Sum of 15C and 15E) 702,811 705,200 tion) from ordinary income into
G. Copies Not Distributed (See instructions to
Publishers #4 (page #3)) 58,964 46,415 capital gains, as well. How? Take
H. Total (Sum of 15F and 15G) 761,775 751,615 Gores as an example. In selling
I. Percent Paid (15C divided by 15F times 100) 91.17% 92.74%
16. Total circulation includes electronic copies. his minority stake to Dyal, he also
Report circulation on PS Form 3526-X worksheet. gave that firm a right to a portion
17. Publication of Statement of Ownership
7 If the publication is a general publication, publication of his management fees. Voilà: a
of this statement is required. Will be printed in the stream of ordinary income be-
November 30, 2019 issue of this publication.

Publication not required. comes a windfall of capital gains,
18. Signature and Title of Editor, Publisher, Business Manager or Owner reducing the maximum rate of
Nina La France,
Senior VP, Consumer Marketing & Business Development 37% to 23.8%—and potentially de-
I certify that all information furnished on this form is true and complete. I understand that anyone who
furnishes false or misleading information on this form or who omits material or information requested on the ferring that tax payment for years.
form may be subject to criminal sanctions (including fines and imprisonment) and/or civil sanctions (including “The official story [to limited
civil penalties).
partners] has always been we
The United States Postal Service (USPS) requires that subscriptions purchased by a company or association don’t make any money on man-
for the benefit of any individual be counted as free distribution. The Audit Bureau of Circulations (ABC), which
Forbes magazine utilizes for circulation validation, counts these same subscriptions as paid. agement fees, we only make


F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

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NEW BILLIONAIRES:
A BAKER’S DOZEN


IT’S BOOM TIMES IN PRIVATE EQUITY, AND THANKS
TO A QUIET FLURRY OF GENERAL-PARTNERSHIP-STAKE STEVEN KLINSKY, 63
SALES, NEW BILLIONAIRES ARE IN BLOOM.
NEW MOUNTAIN CAPITAL, NEW YORK CITY
ASSETS: $20 BIL NET WORTH: $3 BIL
108 SAMI MNAYMNEH, 58 After earning a J.D./M.B.A. from Harvard, Klinsky

cofounded Goldman Sachs’ leveraged buyout
H.I.G. CAPITAL, MIAMI
business in 1981 and then spent years at white-shoe
ASSETS: $34 BIL NET WORTH: $4 BIL buyout firm Forstmann Little. In 1999, he founded


N A former managing director at Blackstone, Mnaymneh started the firm
O in 1993 with Tony Tamer, a former partner at Bain. Masters at buying New Mountain Capital, which specializes in mid-
I size companies. Its May IPO of biopharma services
A T medium-size businesses like Jenny Craig and Mississippi sausage company Avantor produced a multibillion-dollar
maker Southern Quality Meats, many of which produce huge returns.
G The duo also runs a large global credit business and publicly traded windfall.
I
T BDC, WhiteHorse Finance.
S
E
V JOSÉ E. FELICIANO, 46
N CLEARLAKE CAPITAL, SANTA MONICA, CA
I TONY TAMER, 62

E H.I.G. CAPITAL, MIAMI ASSETS: $10 BIL NET WORTH: $2.1 BIL
H A Puerto Rican who studied at Princeton on schol-

T ASSETS: $34 BIL NET WORTH: $4 BIL arship and worked for financial firms like Goldman

A graduate of Rutgers, with a master’s in electrical Sachs and Tennenbaum Capital. Started firm with

engineering and computer science from Stanford Behdad Eghbali in 2006. Clearlake focuses on
and an M.B.A. from Harvard. Lebanon-born Tamer three seemingly unrelated sectors—software, indus-

and his wife, an MIT graduate, are active philan- trials and consumer services. Prominent invest-
thropists. Endowed the Tamer Center for Social ments include Sage Automotive and Unifrax.
Enterprise at Columbia Business School in 2015.
BEHDAD EGHBALI, 43
BARRY STERNLICHT, 58 CLEARLAKE CAPITAL, SANTA MONICA, CA
STARWOOD CAPITAL, MIAMI ASSETS: $10 BIL NET WORTH: $2 BIL
ASSETS: $60 BIL NET WORTH: $3.1 BIL Iranian-born Eghbali may be the world’s youngest
Specializing in real estate investments, Stern- private equity billionaire. He started his invest-
licht founded Starwood in 1991 and later the ment career at TPG Capital, the Texas buyout
W hotel chain and Starwood Property Trust, firm founded by David Bonderman. He also spent

one of the biggest mortgage REITs. After many some time working in business development for
years in Connecticut, Sternlicht moved his firm Turbolinux, a software company focused on the

to Miami in 2018. Japanese market.


money on carried interest,” says Ludovic Phalippou, Oxford embodied the new era of private equity more than Smith.
professor and author of Private Equity Laid Bare. “What Vista invested exclusively in software deals, an industry

this says is: I don’t make money only with carried interest, once seen as off-limits to leveraged buyouts and ignored

I make tons of money with management fees.” by the biggest PE firms. Smith had proved that systemic
software LBOs were not only possible but exceptionally lu-
W uity firm, Blackstone Group, went returns.
crative, scoring some of the private equity industry’s best
hen the world’s biggest private eq-

public in 2007, cofounder Stephen
The leading private equity billionaires preceding Smith—
Schwarzman threw an infamous like Schwarzman, David Rubenstein and Henry Kravis—

star-studded 60th-birthday bash at had all gone public, listing their private equity firms on the
New York’s City’s Park Avenue Armory that many consider stock market in an attempt to cash out and bring in per-
to be the high-water mark of precrisis excess. That year, bil- manent capital. But they were also forced to contend with CHRISTOPHER GOODNEY/BLOOMBERG; FELICIANO AND EGHBALI: ROBERT GALLAGHER FOR FORBES
lionaire Schwarzman enjoyed a $684 million payout. public company challenges—from analyst calls to seeming- TAMER: AARON DAVIDSON/GETTY IMAGES; STERNLICHT: MICHAEL PRINCE; KLINSKY:
But then came the Great Recession, the massive govern- ly irrational market gyrations. Smith didn’t want the hassle
ment bailout of financial institutions and the Occupy Wall of dealing with stock market investors on a quarterly basis.

Street movement. Schwarzman and other Wall Street deni- So he tapped Goodman, who worked at Evercore, the
zens suddenly became villains. So it’s no surprise that the small investment bank founded by former deputy U.S. Trea-
current boom in buyout billionaires is happening out of the sury secretary Roger Altman. Together they met with Mi-
spotlight. chael Rees, who ran Neuberger Berman’s Dyal Capital unit,
By most accounts, the new wave of GP-stake deals start- which had been buying stakes in hedge funds. In July 2015,
ed in 2015 when Vista Equity Partners’ founder, Robert F. Dyal bought more than 10% of Smith’s Vista Equity at a
Smith, went to talk to investment banker Saul Goodman of valuation of nearly $4.3 billion. At the time, Vista had only

Evercore about finding capital in the private market. No one $14 billion under management; today it has $50 billion.

F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

MIKE BINGLE, 47
SILVER LAKE, MENLO PARK, CA
ASSETS: $43 BIL NET WORTH: $1.2 BIL


Joined firm in 2000, after stints at Apollo Global and Goldman Sachs. Within a
decade became co-head of its North American operations. He helped close
deals for Ameritrade, Virtu Financial, Datek Online, SoFi and Ancestry.com.

SCOTT KAPNICK, 60 GREG MONDRE, 45 109
HPS INVESTMENT PARTNERS, NEW YORK CITY SILVER LAKE, MENLO PARK, CA
ASSETS: $55 BIL NET WORTH: $1.4 BIL ASSETS: $43 BIL NET WORTH: $1.2 BIL
Formerly CEO of Highbridge Capital, the hedge Joined Silver Lake in 1999. He has done deals for T
fund and credit manager owned by JPMorgan. Sabre Corp., Vantage Data Centers, UGS Corp., H
Kapnick started at Goldman Sachs, where he rose GoDaddy and Motorola Solutions. He first started E

to co-head of investment banking and co-CEO of doing tech private equity deals at TPG and also
I

Goldman Sachs International. He left before the worked at Goldman Sachs. N
financial crisis and joined Highbridge in 2007 after V


its sale to JPMorgan to build a credit business. In E
S
2016, JPMorgan divested HPS. Assets have since T
ballooned. LAWRENCE GOLUB, 60 I
G
GOLUB CAPITAL, NEW YORK CITY A T
ASSETS: $30 BIL NET WORTH: $1.1 BIL I
EGON DURBAN, 46 Founder of Golub Capital, which claims it received O

no tax benefit from its stake sale. A former banker N
SILVER LAKE, MENLO PARK, CA
with stints at Allen & Co., Wasserstein Perella and
ASSETS: $43 BIL NET WORTH: $1.2 BIL Bankers Trust, Golub founded Golub Capital in 1994
One of four managing partners who now run the as a traditional leveraged buyout firm. In 2001, he

firm, which specializes in tech investments and pivoted and turned the firm into a lender, mostly to


manages $43 billion. Durban is best known for other private equity firms like Vista Equity and Thoma


orchestrating high-profile deals for Dell, Motorola Bravo. Since the crisis, assets have grown fifteenfold.


Solutions and Pivotal Software. Was a founding


principal of the firm in 1999.
DAVID GOLUB, 57
GOLUB CAPITAL, NEW YORK CITY
KENNETH HAO, 51
ASSETS: $30 BIL NET WORTH: $1.1 BIL
SILVER LAKE, MENLO PARK, CA Joined brother Lawrence in 2003 at Golub Capital, which says it received
ASSETS: $43 BIL NET WORTH: $1.2 BIL no tax benefit from its stake sale. He’s now CEO of the firm’s publicly




Hao expanded the tech private equity firm into key Asian markets by traded Golub Capital BDC. After graduating from Harvard, Golub got a



starting offices in China and Japan. He led Silver Lake’s profitable invest- master’s in philosophy from Oxford, where he was a Marshall Scholar, and

ment in Alibaba Group. Hao joined Silver Lake in 2000 after spending an M.B.A. from Stanford. He was the first chairman and a longtime direc-

nearly a decade at San Francisco investment bank Hambrecht & Quist. tor of the Michael J. Fox Foundation for Parkinson’s Research.
“The Vista deal woke everybody up,” says one senior Wall leveraged, long-term model had seemingly been tailor-
Street dealmaker. made for a low-interest-rate prolonged bull market.
Rees quickly pivoted to focus on private equity. By Sep- In a typical deal, Rees would spend between $400 mil-
tember 2015 he was telling institutional investors like the lion and $800 million over a two- to four-year period and
New Jersey State Investment Council that Dyal’s private eq- in return receive a 10% to 20% stake in all of a private eq-
uity stake deals were a “natural continuation of its existing uity firm’s net management fees and half of its performance

business in acquiring similar stakes in hedge fund manag- fees, or carry, meaning Dyal would get, say, 15% of the fu-
ers.” He marketed the Dyal private equity general partner- ture management fees and 7.5% of the carry. Dyal’s minority
ship funds as steady income-gushers, with yields in the low stakes were passive—Rees would have no say in the running

teens, at a time when Treasury bills were near zero and AAA of the private equity firm. To make it work, Rees structured
corporates paid less than 4%. For the liability-matchers of his Dyal funds as perpetual vehicles with a life span as long
the pension and insurance world, it was music to their ears. as forever, meaning Rees would never be forced to sell his
The hedge fund boom was ending, and private equity— general-partnership stakes—so he and his institutional in-
with its ten-year life-span funds—seemed like a better deal. vestors could hold on to them like a high-yield annuity.
Assets under management are stable, making those 2% fees If the private equity managers selling decide to leave the
associated with them more predictable. Limited partners proceeds in their firm or roll it into its other funds, the PE

almost never default on the capital commitments. managers pay no tax on it—the tax bill is deferred—until
By contrast, hedge funds proved inherently more vola- the money comes out. In other words, the seller gets to turn
tile. In early 2015, for example, Dyal bought a 20% stake in future ordinary income into long-term capital gains—and
activist hedge fund Jana Partners at a $2 billion valuation if they leave the money in the fund, they effectively invest

when Jana managed $11 billion. But within four years Jana pretax and put off the tax bill indefinitely.


was down to $2.5 billion in assets managed as returns went Either way, the government is collecting less tax revenue,
south and investors yanked their capital. Private equity’s because Dyal’s investors are often foreign and tax-exempt
GOLUB: JOHN MINCHILLO/INVISION/AP
KAPNICK: BENNETT RAGLIN/GETTY IMAGES; MONDRE: JARED SISKIN-PMC/GETTY IMAGES;
N O V E M B E R 3 0 , 2 0 1 9 F O R B E S . C O M

institutions and its funds use structures known as “corpo- Silver Lake now manages $43 billion, and Forbes estimates
rate blockers,” which protect investments from taxation. that Durban, Hao, Bingle and Mondre, all under 52, are
It’s a pretty slick tax-avoidance trick, and there’s noth- billionaires.
ing illegal about this or about corporate blockers. A decade A few months after the Silver Lake stake deal, Dyal’s Rees
ago, tax lawyers called “management fee waivers”—in which bought a stake in Starwood Capital, a real-estate-oriented
buyout managers gave up management fees in exchange for firm owned by Barry Sternlicht, which now manages $60
more carried interest—the “holy grail” because the waivers billion. Another Dyal deal from 2016 was a near 15% stake
converted top-bracket taxable income to capital-gains-rate in H.I.G. Capital, a private equity firm run by Sami Mnaym-
110 income and deferred taxation for years. neh and Tony Tamer. The stake deal gave Sternlicht an esti-
But in 2015 the Internal Revenue Service indicated that it mated net worth of $3.1 billion. Mnaymneh and Tamer are
would begin auditing these fee waivers. Thoma Bravo, the now worth $4 billion each.
N
O private equity firm run by billionaire Orlando Bravo, for ex- Credit-oriented PE firms—which have been thriving as
I ample, told its investors that the IRS was auditing its man- heavily regulated bank lenders have retreated from riskier
A T
G agement fee offsets in its 2012 fund. loans—are also getting in on the game.
I With fee waivers out, these stake deals allow Wall Street’s Take the case of Scott Kapnick. A former co-head of in-
T
S
E billionaires club to continue to admit new members. Some vestment banking at Goldman Sachs, Kapnick founded HPS
V have even coined a name for them: “Synthetic fee waivers.” Investment Partners in 2007 while working for JPMorgan
N
I Chase’s Highbridge Capital hedge fund unit. HPS’ private

T    ality: Firms are selling off pieces of them- zanine lending, was so successful that Kapnick became CEO
E
H he current deal bonanza reflects another re- credit platform, which specialized in senior debt and mez-
T
selves to build staying power. What fol-
of all of Highbridge when its cofounder billionaire Glenn
lowed Blackstone’s initial public offering in Dubin left the bank in 2013. But in 2016, JPMorgan decided
2007 was a sixfold increase in assets in the to spin out most of HPS with Kapnick as its CEO.
ensuing decade, from $88 billion to $545 billion currently. Fast-forward two years to July 2018 and HPS is managing
Today’s private stake deals offer a glimpse into the up-and- $45 billion. Dyal’s tax-advantaged bite of HPS has turned
coming firms that will dominate tomorrow’s Wall Street. former career banker Kapnick, 60, into a billionaire.
In July 2016, Silver Lake, a private equity firm known for Don’t expect populist cries about income inequality to
tech deals like Skype and Alibaba, tapped Dyal to raise $400 slow down the blizzard of private equity stake deals coming
million. At the time, the Silicon Valley-based firm managed to market.
$24 billion and the deal valued the operation at about $4 In December 2018, Blackstone, which is ramping up its
billion. Silver Lake was founded in 1999 by tech investing GP-stake business, bought just under a 10% stake in a little-
pioneers Jim Davidson, Glenn Hutchins, Dave Roux and known New York City firm called New Mountain Capital
Roger McNamee. McNamee left early on in 2004, and by run by a Forstmann Little refugee named Steven B. Klinsky.
2013 Davidson, Hutchins and Roux had also moved on. The Blackstone’s cash injection helped put Klinsky’s net worth
firm’s younger partners, led by Egon Durban, Kenneth Hao, at an estimated $3 billion. (New Mountain vehemently
Mike Bingle and Greg Mondre, wanted more cash to contin- denies Forbes’ valuation, arguing the net present value as-
ue investing in the firm’s enormous new funds. They were sumes success for many years.)
asset-rich but in need of liquidity. Vista’s Smith has gone as far as to tap the well for a sec-
The new managing partners used part of the $400 mil- ond helping. In 2017 Dyal bought another sliver of Smith’s
lion raised by Dyal to increase their own commitments in firm, valuing it at $7 billion. Mnaymneh and Tamer of H.I.G.
their funds. Some of the proceeds went to the founders, have also sold a second stake. Kuwait’s sovereign wealth
part of an agreed-on sum related to the transfer of the firm, fund is now making investments in general partnerships, as
by investing on their behalf in Silver Lake’s funds. After is a firm run by Jeb Bush and another created by the family
the Dyal deal, Durban and the other remaining Silver Lake office of Richard and Betsy DeVos.
partners wound up with 90% of the firm’s future net free in- “There is a need for capital. These businesses can con-
come. Davidson retained a slice of future performance fees sume a lot of capital, so the capital is important,” says Dyal
in Silver Lake Fund V. Capital’s Rees. “The vast majority of our invested capital
Meanwhile, Durban, 46, masterminded an incredible stays in the business to fund GP commitments and product
deal for Dell that has so far returned $4.4 billion in profit. extensions.” F


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THOUGHTS ON



Family




“Family: a unit composed not “The best you can really hope
only of children but of men, for is a family where
women, an occasional animal everyone’s problems, big
112 and the common cold.” and small, work together.
Ogden Nash Kind of like an orchestra
where every instrument
is out of tune in exactly
“Families are about love over- the same way, so you don’t
coming emotional torture.” really notice.”
Matt Groening Neal Shusterman


“They were a tense and “When I walk, I walk with
peculiar family, the you. Where I go, you’re with
Oedipuses, weren’t they?” me always.”
Max Beerbohm Alice Hoffman


“I had underestimated this “Think of your forefathers!
place where I was born. I Think of your posterity!”
knew it was a good place to
be from. I had no idea how John Quincy Adams
great a place it was to be.”
Rod Dreher “A family can be the bane of
one’s existence. A family can
also be most of the meaning
“The greatest gift a parent can
leave a child is that parent’s of one’s existence.”
own independence.” Keri Hulme
Rosamunde Pilcher

“Start children off on the
way they should go, and
“One day you will do things
for me that you hate. That is even when they are old
what it means to be family.” they will not turn from it.”
Proverbs 22:6
Jonathan Safran Foer


“Call it a clan, call it a network, The Mighty Marriotts

call it a tribe, call it a family. FINAL THOUGHT
Whatever you call it, whoever February 1, 1971
you are, you need one.”
Jane Howard
First came Bill and Alice. Then their son Bill Jr. as well
as his younger brother, Richard. More than 40 years
“Parents learn a lot from
their children about coping after Bill Sr. founded Marriott Corp., he and his nuclear

with life.” family still commanded the company from its top floors.
Muriel Spark What had once been a lone Beltway root-beer parlor had
become a thriving, $315-million-in-sales collection (some

“Imperturbability could be $2.1 billion in current dollars) of hotels and restaurants,

depended upon. And from including Big Boy Coffee Shops and Roy Rogers.
her great and humble position The Marriotts owed a great deal of their success to
in the family she had taken their tight-knit family. “The principles of operations
dignity and a clean calm “Our Rockefellers, Carne-
beauty.” remained the same: close family supervision of all gies, Fricks, Vanderbilts,
John Steinbeck details, with Alice keeping the books; Bill running the Goulds, Hills, Harrimans,
Astors, Eastmans, Still-
business; benevolent and paternalistic labor relations; mans, Pullmans, Fields,

“The difference between a [and] a flair for promotions.” can bequeath enormous

‘man’ and a ‘father’ is that the fortunes, but they cannot
bequeath brains. Not one
former shares his genes, but SOURCES: THE LITTLE WAY OF RUTHIE LEMING, BY ROD DREHER; THE SHELL Napoleonic son has sprung
the latter gives his life.” SEEKERS, BY ROSAMUNDE PILCHER; EVERYTHING IS ILLUMINATED, BY JONATHAN from these titans.”
SAFRAN FOER; THE GRAPES OF WRATH, BY JOHN STEINBECK; THE COMFORTERS,
Craig D. Lounsbrough BY MURIEL SPARK; THE STORY SISTERS, BY ALICE HOFFMAN; ANTSY DOES TIME, —B.C. Forbes
BY NEAL SHUSTERMAN; THE BONE PEOPLE, BY KERI HULME.



F O R B E S . C O M N O V E M B E R 3 0 , 2 0 1 9

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