What happened to Whitney?

One of America's oldest private investment institutions, Whitney grew from a venerable boutique into a globe-spanning franchise with ambitions to become the Goldman Sachs of alternative assets. But in the middle of 2000, Whitney began an excruciating contraction under the guise of “back-to-basics”. The firm's dramatic ups and downs can be attributed to unfortunate market timing, but also to its charismatic and aggressive chairman and CEO, Peter Castleman. David Snow investigates

Arecent visitor to Whitney & Co.'s headquarters in Stamford, Connecticut, was struck by the beauty of the firm's offices, which are resplendent in wood trim and high-tech facilities. More striking, though, was the fact that his view was unobstructed by Whitney employees. “There was almost no one there,” he says. “It was like an empty football field.”

The firm's vast, underpopulated headquarters are a stark reminder of Whitney's abandoned attempt to become one of the world's largest managers of alternative investments.

Many private equity firms were caught off guard by the economic sea change, Whitney's experience is a study in extremes

At its peak in May 2000, Whitney employed nearly 250 people around the globe. It maintained offices in New York City, Boston, San Francisco, London, Tokyo, Hong Kong and Singapore. The firm's headquarters in Stamford took up three full floors at 177 Broad Street, and for a time Whitney also rented a nearby auxiliary office to accommodate its swelling ranks of professionals.

Whitney has since closed all but its Stamford and San Francisco locations. Sources familiar with Whitney estimate that no more than 25 people currently work at the firm. This number is difficult to confirm, as information on Whitney's personnel has been removed from the firm's Web site.

By most accounts, Whitney is now functioning as an astute, middle-market buyout firm. Even former Whitney professionals not particularly fond of the firm's chairman and CEO, Peter Castleman, say that he has done well with recent investments in solid, cash-flow positive businesses like Herbalife, a nutritional supplement company, and Synertech Health Systems and AMISYS, two healthcare services companies.

To his investors, Castleman has been humble and apologetic, but resolutely optimistic about the firm's more recent private equity investments, as well as its prospects for continued success. At a specially scheduled limited partner meeting in June, Castleman described the recent departure of professionals from the firm as the natural attrition of a meritocratic organisation, according to people in attendance. He said he and his fellow Whitney investment professionals were “very embarrassed” by decisions taken in connection with the firm's fourth private equity fund, which closed on $1bn in 2000, but that the new fund, Whitney V, a $1.1bn vehicle closed in 2001, was in great shape thanks to a vigorous back-to-basics strategy. “You left the meeting convinced that they are working as hard as they can,” says an investor. “It was pretty upbeat.”

“There are a lot of rumours about Whitney out there,” the investor adds. “I think they wanted to get ahead of these and address them head-on. They are the first to tell you that they made a lot of mistakes in Fund IV, but Fund V is exactly where they want to be.”

The LBO that failed
Castleman has played the role of contrite investor communicator before, with great success. In 1992, J.H. Whitney & Co., as it was then called, was reeling from a disastrous $150m investment in the leveraged buyout of Prime Computer, a maker of computer workstations. The investment, made in 1989, was led by then-Whitney partners Russell Planitzer and Don Ackerman. Castleman, who also worked on the deal, sat on Prime Computer's board. At the time, leveraged buyouts marked a departure for the traditionally venture-focused firm. But in the LBO-mad late 1980s, straight venture capital investing wasn't holding the attention of all of Whitney's partners.

Prime Computer was a classic LBO, with plenty of leverage, and a classic LBO flame-out. By 1992, the company had $1.24 in debt to service, but declining sales. Whitney wrote off the entire investment, and Planitzer and Ackerman resigned from the firm.

Castleman, then just 35, convinced the man who had run Whitney for three decades, Benno Schmidt, that a generational change was in order, and that Castleman and another partner, Michael Brooks, were the right people to lead the transformation. Castleman enlisted his friends, Bill Laverack and Michael Stone, and moved Whitney from Rockefeller Center in Manhattan to Stamford. The reborn J.H. Whitney began to grow assets under management at a rapid clip.

J.H. Whitney & Co. was founded in 1946 by John Hay “Jock” Whitney, a noted industrialist, diplomat and philanthropist. After an illustrious military career, which included an escape from German captivity in wartime France, Jock Whitney returned to found what the firm's literature describes as “the first venture capital investment firm in the United States.” The firm Whitney founded backed the creation of some of the greatest success stories in American business, from Minute Maid orange juice to Compaq Computer.

The Prime Computer failure – which represented the largest investment ever made by Whitney up to that point – had seriously damaged the firm's once-sterling reputation. Thanks in part to Castleman's considerable talent for persuasion, Whitney began to attract top-notch investors, who accepted that the new Whitney had learned valuable lessons from its painful experience with Prime Computer. The mea culpa was effective – the list of Whitney's investors reads like a Who's Who of prestigious alternative investment programs and includes CalPERS, the Ford Foundation and Glenmede Trust Co.

Then as now, Castleman acknowledged the firm's mistakes to these investors, but articulated a vision of a revitalised Whitney that would move from success to success as a manager of third-party capital. It was a vision that few could resist.

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“Peter is an incredible motivator, which is in no small part why so many people joined him,” says a former Whitney professional.

The vision
Under Castleman, Whitney had a string of investment slam-dunks through the mid-1990s. Whitney's asset management business steadily grew and broadened until the firm's momentum reached its apex in 2000, just as the market began its monumental collapse. While many, many private equity firms were caught off guard by this economic sea change, Whitney's experience is a study in extremes. According to interviews with more than a dozen former and current, junior and senior Whitney professionals, as well as investors, the peculiarities surrounding Whitney's continuing transformation have chiefly to do with the peculiarly hard-charging management and personal style of the firm's chairman. (Castleman did not return calls for this article.)

The firm was to have a smorgasbord of high-octane funds and really become an asset aggregator

“Peter is aggressive every which way,” says a former Whitney professional. “He was aggressive on the way up, and when he was cutting, he had his pedal to the metal.”

Castleman's vision for Whitney was considerably more expansive than that of any of the firm's former leaders. In the late 1990s, as capital was gushing into private equity funds, Castleman sought to grow Whitney's refurbished franchise beyond just private equity.

“Peter's vision was to become the Goldman Sachs, or the Fidelity, of alternative assets,” says a former Whitney professional.

“He wanted to create a new and better Carlyle Group,” says another ex-employee, referring to the global private investment powerhouse. “The firm was to have a smorgasbord of high-octane funds and really become an asset aggregator.”

In 2000, Whitney had more than $5bn under management. One professional then at the firm claims the goal was to grow that number to $25bn within five years. At its peak, Whitney managed eight funds, according to one source, including private equity funds, a mezzanine debt fund, structured debt funds, two hedge funds (including one trading Japanese equities) and an SBIC operation, meaning a fund that accessed government loans for small businesses investments.

Peter was so motivating and inspiring which is why he was able, at the height of the market, to recruit very talented people away from very attractive situations

These products were to be just the beginning of the Whitney juggernaut. Castleman envisioned a firm that would be perpetually fundraising around the world for numerous strategies. As such, Whitney began hiring scores of investment professionals and a large team of dedicated marketing specialists to raise capital for their activities. Castleman did not take a gradual approach. The majority of people to join Whitney did so in the 12 months leading up to May 2000, according to several people familiar with the situation.

Consuming passions
At the time, the expanding firm was an exciting place to be for those fortunate enough to be brought on board. “Peter was so motivating and inspiring,” says someone hired during this heady period. “Which is why he was able, at the height of the market, to recruit very talented people away from very attractive situations.”

Those who have met Castleman in non-business situations describe him as low-key and almost humble. Despite his wealth, good looks and angular frame, Castleman is nevertheless “not at all a Gordon Gekko,” as one former employee puts it.

Castleman's low-key persona masks his intensely aggressive approach to three consuming passions -Whitney, personal fitness and golf.

Above all else, Castleman has devoted his considerable energies to Whitney. During the firm's period of rapid growth, it was not unusual for its chairman to arrive at the office at 3:30 in the morning. Castleman, in Stamford, would frequently leave morning messages for professionals in the London office before anyone there had arrived at work.

At some point in the morning, Castleman would typically head to the office's state-of-the-art gym for one or two hours of intense exercise. “You didn't want to be on the treadmill next to him,” says a former employee. Castleman would often be seen still at the office by Whitney professionals heading home for the evening.

“He'd show up at 3:30 in the morning, spit out 100 e-mails, and then hit the treadmill and burn 2,000 calories,” says another former Whitney professional. “He's got, like, three per cent body fat.”

When not working, Castleman would be on the golf course, where he would often play 36 holes straight through. One former employee estimates his golf handicap at roughly four or five.

At the beginning of 2000, Castleman's private equity game seemed just as impressive. The firm was deploying its billion-dollar fund in technology, telecom and dotcom deals around the world. The Whitney brand was growing in value. In June, Castleman announced that “J.H.” would be dropped from the firm's name in an effort toward “simplifying our identity.” In September, a Bloomberg reporter wrote a positive article about Castleman and his firm, headlined “Back From the Brink.”

Cutting back
As it turned out, Whitney, along with the rest of the private equity market, was already careening toward another brink. As fundraising for Whitney's fifth fund, with a $2bn target on the cover, plodded along, many of the investments in Whitney's fourth fund were crumbling. A person familiar with the fund estimates that roughly $200m in investments done in Europe have been written off, while another $200m worth of Asian investments have been written off. Unlike the Prime Computer disaster, Fund IV's problems unfolded in scores of separate investments. “Fund IV is going to be well, well below par,” says a former Whitney professional.

One source claims that Whitney's overseas offices, in particular, had been staffed by people without much private equity investment experience.

Several senior defections also hurt Whitney's fundraising effort for Fund V, including the departure of Mike Brooks, who left to join New York venture capital firm Venrock.

In May 2001, Whitney was finally able to close its fifth fund on $1.1bn, but the vision of a family of funds with a global mandate was over. Castleman shut down all overseas offices and declared the new fund to be a middle-market, US-only investment vehicle. The steady stream of lay-offs, resignations and office closings had begun.

Not surprisingly, the rightsizing at Whitney has been accompanied by a great deal of acrimony. Some former professionals say Castleman prevaricated on promised new compensation schemes, which led to further departures. “I think the comp plan changed four or five times in ten months,” says someone who has left the firm.

Other former Whitney professionals say that as the firm shrank, the atmosphere there grew less and less pleasant, with Castleman prone to shouting his displeasures at employees. “If anybody got on the wrong side, the F-bombs started getting hurled,” says a former Whitney pro.

They are the first to tell you that they made a lot of mistakes in Fund IV, but Fund V is exactly where they want to be

Of course, the private equity industry, and Wall Street in general, is filled with aggressive bosses who do not place great value in being nice guys at the office. In addition, as one former Whitney professionals says, the view of an organisation by an ex-employee is seldom rosy: “When people leave firms it's never a happy occasion. When it's involuntary, it's even worse.”

In any case, most people formerly affiliated with Whitney are restricted from saying much about the firm because of separation agreements they signed upon departure. These legal contracts include “mutual non-disparagement” clauses that prohibit the communication of anything negative about the firm and vice versa. Some former professionals also continue to hold economic interests in Whitney funds.

In addition to its fifth private equity fund, Whitney continues to manage roughly $500m in hedge fund assets, as well as a mezzanine debt fund. But it is unclear whether the firm has plans to raise any new capital for those strategies. According to a number of sources, Castleman says he is focused solely on managing its most recent private equity vehicle, the success of which may decide Whitney's future. Fund V is approximately one-third invested.

At least one investor applauds the transformation of Whitney to its current scaled-down state. These changes were entirely necessary, he says, given the gross overexpansion of the firm during Fund IV More private equity firms should be as focused on cutting costs, he says, adding that few firms were more in need of cost-cutting than Whitney.

One LP has created a new verb, telling GPs to “Whitney” their organisations by focusing on core competencies.

No one interviewed for this article knew whether Castleman and the remaining private equity professionals had plans to attempt another fund.

While limited partners say they approve of Whitney's apparent candor and renewed focus, they are taking a wait-and-see attitude pending the performance of the current fund. One investor says he doubts his fellow LPs will be very forgiving should an opportunity to reup in a new Whitney fund present itself. “[Castleman will] have a hell of a time raising any more capital,” he says.

But those who have predicted Whitney's, and Castleman's, demise in the past have consistently been proved wrong. As one former Whitney insider puts it, “It's hard to tell someone that you've lost their money and then get them to reinvest.” Yet Castleman has done precisely that before, and he may well have the determination and talent to do so again.