David Bonderman

Breakfast with the FT: David Bonderman

It is 7.30am at the St Regis Hotel in New York and the Astor Court, where breakfast is served, is almost deserted. The St Regis is a staid Midtown hotel built in 1904 that sits between Fifth and Madison avenues. Many of the staff appear to be only slightly younger than the hotel itself. When David Bonderman, irreverent billionaire co-founder of buy-out firm TPG (formerly Texas Pacific Group), saunters in, the underemployed staff scurry over to greet him by name. Bonderman always stays in the St Regis when he passes through New York. He says it is because he is loyal (although he later tells me that loyalty to the undeserving is his biggest flaw) and because they unpack his bags for him.

This is going to be a swift meeting: the end of the buy-out boom has hardly slowed TPG, and Bonderman is going on from our breakfast to Wall Street. In April, the firm led a $7bn infusion into troubled Washington Mutual, the largest savings and loan bank in the US. Last month, it injected £180m into Bradford & Bingley, the largest lender to landlords in Britain. During the first week of June, TPG and Goldman Sachs sold Alltel, a cellular telecoms group, to Verizon Wireless and made $1.3bn on the sale, having held the company for a mere seven months. TPG also became the envy of its peers when the Chinese State Administration of Foreign Exchange gave the company almost $3bn to manage, the largest-ever single allocation to a US private equity firm.

Once a bankruptcy lawyer, Bonderman, 65, is now one of the most prominent figures in the dizzying world of private equity, named as the 105th richest American, with a net worth of about $3.3bn, according to the 2007 Forbes 400 List. He is a big, dishevelled man, sometimes seen wearing socks that don’t match (although TPG is co-owner of Neiman Marcus, arguably the swankiest department store chain in the US).

He orders only an orange juice. It arrives immediately and my attention is distracted as I watch him shovel copious amounts of ice into the glass with a silver spoon from a silver bowl. He never drinks coffee and eyes my cappuccino with scepticism.

I start by asking what he was doing in Texas – he flew from there into New York the previous night on his private jet – and he tells me he was visiting a power plant he took over last year when TPG and Kohlberg Kravis Roberts & Co bought Texas utility TXU. It was one of the biggest (and last) acts of the buy-out boom. “The two boilers are 26 storeys high,” he says approvingly.

Bonderman logs about 2,000 hours a year on his jet. Though long interested in aviation, he has never been tempted to get a pilot’s licence. He confesses that he lacks the attention span. “People who know me find the idea scary,” he had told me at an earlier meeting. In an early deal, he rescued Continental Airlines and once sent his inedible dinner to the airline’s chief executive officer with a note of complaint. Bonderman also noticed the potential of Ryanair, the Irish airline that has become a British byword for low-cost air travel, and has been chairman of its board since 1996.

I also know from previous meetings that he doesn’t waste time on small talk, and today I notice he wears no wristwatch and doesn’t carry a BlackBerry. He repeatedly asks me the time and looks at the clock on his mobile phone. He is not a gadget person. Unlike fellow financial titans such as David Rubenstein, co-founder of Carlyle Group, who told his staff that the happiest day of his life was the day internet access was installed on his private jet, Bonderman says he doesn’t generally respond to e-mails over the weekends.

What goes on behind the hedge fund?
The fashionable finance worlds of private equity and hedge funds can seem impenetrable fortresses designed to keep outsiders at bay. So, to detangle TPG from PG Tips, here’s a demystification guide by Henny Sender and Isabel Berwick.

Private equity: Last year’s Masters of the Financial Universe, private equity firms used a mix of cash from their own investors and many billions more, borrowed from banks and the debt market to buy ever-larger listed companies including retailers such as Alliance Boots and rental car firm Hertz. The private equity business model is to buy up firms, delist them from the public stock market and then resell them, making billions in profits in the process. Now that banks are far less willing to lend to private equity firms, last year’s masters are less feared and envied. Even so, plenty of private equity money is still sloshing about, this time scooping up riskier bargains – such as TPG’s recent investment in Bradford & Bingley.

Hedge fund: A hedge fund is a big pool of investor money. Its managers can buy and sell anything. The name comes from a hedge fund’s nimble ability to bet on rising and falling markets – so hedging its bets. Crucially, hedge funds can do something not open to the big mainstream funds (unit and investment trusts). They can “sell short”, which means they buy (or, to be accurate, pay to borrow someone else’s) shares and then sell them. They are gambling that the price falls, so when the original owner wants the shares back, the seller re-buys them and hands them back, making a quick profit.

This month the UK regulator, the Financial Services Authority, told hedge funds to stop undermining the banking system by using short selling to lower the prospects for banks’ rights issues (when banks sell new shares in the market to raise some quick cash). The “hedgies” aren’t happy at all. Watch this space. Hedge funds have traditionally looked with envy at their competitors in private equity firms. That’s because the latter have much more patient investors and funds with an average life of 10 years.

Venture capital: A more old-fashioned word (and world) than private equity but it means a similar thing. These days, venture capital money mainly flows into small and start-up companies, and into buy-outs. Private investors can also buy into venture capital trusts, which invest in small companies and come dangling tax advantages in their wake.
Bonderman rarely grants interviews and is reluctant to discuss personal matters when he does, although he is known to have five children from two marriages – the two youngest are still at school. He grew up in Los Angeles, attended the University of Washington in Seattle, graduating in 1963, and went on to Harvard Law School. He practised as a lawyer in Washington, DC, and taught briefly at Tulane Law School in New Orleans before leaving academia in 1983 to work for the Texan tycoon Bob Bass in his Robert M Bass Group. This is where he met James Coulter, who is still his business partner. Bonderman and Coulter are probably the most successful-ever private equity investment team, with Bonderman cast as the risk-taker and the younger Coulter the restraining influence.

In 1988, while still at the Bass Group, Bonderman and Coulter brokered the deal that made them stars. The two put $150m into American Savings Bank and made billions for Bob Bass when they sold it. “The government waived all these rules to encourage capital to come in freely,” Bonderman reminisces when I ask him about it. “The government absorbed all the losses. Private capital was much scarcer then than now. The dynamics have changed.” The duo left Bass’s operation and founded Texas Pacific Group in 1992.

Many successful investors balance their faith in their deals with a sense of paranoia, obsessing on how to hedge the risk. Bonderman has such confidence in his own judgement that it is up to his partners, notably Coulter, to hold him back. The downside for his colleagues is that when TPG is too cautious and loses lucrative deals to competitors, Bonderman chides them publicly for their caution.

TPG’s April deal to save Washington Mutual (WaMu) was on the same scale and audacity as the American Savings Bank rescue. Rivals such as KKR and Carlyle Group had looked at WaMu and concluded that it was too early to wade in. But Bonderman loves the WaMu deal – as he loves all his deals. He has served on the board at WaMu and is familiar with its management. “Where WaMu gets to is more important than when it gets there,” says Bonderman. “This is the strength of private equity. We can be patient.”

He may need to be unnaturally patient in the coming months. The private equity boom is over, credit markets are frozen and many financial firms are in trouble but Bonderman relishes the challenge. He has a war chest of some $25bn. “Private equity does better in bad markets than in good markets,” he says, eyeing my plate of sliced bananas and noting that now prices for companies are dropping to reasonable levels. “To buy inexpensively is always better.”

While most of his peers make some effort to answer questions they don’t like, Bonderman doesn’t bother with niceties. Instead, when I ask whether any of TPG’s companies are performing poorly or how much money he has raised in China, he just says flatly: “Why would I answer that?” He doesn’t save his disdain for journalists either – he rarely networks with corporate America or attends high-profile charity events, preferring to relax at his ranch in Colorado, which is so vast that his partners refer to it as the “Bonderosa”. There is another home in Fort Worth but he doesn’t have the string of foreign mansions that other private equity billionaires seem to accumulate.

Bonderman’s abrasive style has landed him in trouble more than once. At a Hong Kong conference last year his comments about Japan were so abusive that his colleagues, who were sitting close to the front, put their heads in their hands. First he criticised the ritualistic, slow approach of the Japanese to doing deals. His subsequent comment that, “They hate us but that’s OK because we hate them, too,” went down badly, as did, “Besides, look at the demographics. There will be fewer of them soon.” His partners have now banned him from setting foot in Japan. He periodically insults the French with equal passion.

In the annual meetings for investors, he will often wear the same sweatshirt three days in a row, which some may take as a lack of respect. For our breakfast he is at least wearing socks that match. By 8.15am, the ice in the orange juice has melted and the Astor Court is filling up. Among the new arrivals, to Bonderman’s relief, is Marc Lasry, founder of Avenue Capital and a long-time friend with a shared interest in politics, particularly Democratic politics. (Chelsea Clinton works for Lasry although she took time off to campaign for her mother.) Bonderman happily pulls up a chair for Lasry. I take advantage of the interlude to take a few spoonfuls of muesli and spear a few slices of banana.

The staunch Democrats discuss the state of the campaign. Bonderman is a fan of Obama even if he concedes that Clinton “had better [fundraising] concerts”. Bonderman’s 60th birthday party, held in Las Vegas five years ago, featured the Rolling Stones.

“My 15-year-old daughter can run this country better than the current president,” Bonderman observes dryly. He is highly critical both of the Bush White House and financial supervisors. “This administration has been in cahoots with ostensibly independent regulators,” he says. “They have been priming the pump as if this country has been in recession a long time. We’ve had low taxes and have increased spending wildly and that is obviously unsustainable over the long term. We will pay the price for years of the excesses under our current president, Mr Fillmore.” During the last presidential campaign, Bonderman famously wondered whether comparing President Bush to the unsuccessful 13th President of the US was an insult to the dead man.

Catch-up over, Lasry rejoins his own breakfast gathering, the waiters solicitously remove the abandoned chair and Bonderman suddenly perks up. It seems to have dawned on him that a morning interview with a journalist may not be a total waste of time. He wants to make a technical point, through me, about current accounting policies, which mean that the debt of his companies, such as the recently acquired TXU utility, now trades at less than 100 cents on the dollar. He is convinced that when the debt matures, holders will get 100 cents on the dollar. “The accounting policies are absurd and destabilising,” he announces in his usual dismissive way. “You ought to write about that.”

Bonderman rarely speaks out on such narrow issues, preferring sweeping hyperbolic statements, such as: “The current president’s policies will drive the dollar to zero.” But the accounting issue is being hotly debated, with some experts saying that that the new regime – which forces many financial players to value their securities at the price they would fetch if sold in the market at that very instant, no matter how turbulent the market – has amplified the credit crisis. That in turn has made the banks more reluctant to lend to private equity firms and has hurt their business. (The matter is still being discussed. US Treasury officials say they might tweak it slightly but nobody is expecting a big change.)

It is now 8.45am and from his non-breakfast at the St Regis, Bonderman has to drive down to Wall Street to attend a meeting at the Federal Reserve Bank of New York. His driver is waiting. In another demonstration of Bonderman’s loyalty, I discover that Boris, a fierce Ukrainian, has been his driver in New York for the past 20 years. From the Fed’s fortress-like quarters, Bonderman will go directly to LaGuardia airport where his jet, “DB” written on its tail, will take him to Seattle to visit WaMu.

“You haven’t eaten those bananas,” he deadpans, finally forking a few slices as he pulls back his armchair. Then he wanders off distractedly, en route to further world domination, staff bowing in his wake.

Henny Sender is the FT’s international finance correspondent

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Astor Court
St Regis Hotel
Two East 55th Street at Fifth Avenue, New York

1 x cappuccino $12
1 x Bircher muesli with sliced banana $21
1 x orange juice $9

Total $42