Institutional Investor's Alpha Magazine - November 2008 - (Page 29)

D rence Cutler, who was promoted from chief compliance ofﬁcer to chief operating ofﬁcer in January 2007, DBZ has closed ofﬁces in Beijing, Milan, Seoul, Taipei, Tel Aviv and Tokyo and downsized its operation in New Delhi. The 120 people left at DBZ’s New York headquarters largely handle portfolio management, accounting, operations and other middle- and back-ofﬁce functions, reporting to recently promoted DBZ president David Lee. Most of the money for the wind-down is coming from the 2 percent management fee that DBZ charges. Given the ﬁrm’s $3.5 billion in assets, that comes to about $70 million a year — but the number is shrinking as DBZ returns capital to investors. Just this month investors agreed to allow Zwirn to use $19.5 million in 2004 investment fees, which had been withheld offshore and reinvested in the fund, to help cover next year’s expenses. “We have massive ﬁxed costs managing this business,” Zwirn says. “We certainly are not proﬁting from this.” He estimates that resolving the situation has cost him personally $70 million in legal and accounting fees alone — “the vast majority of my net worth.” Meanwhile, he is trying to raise new capital. As recently as October, DBZ held discussions about a potential deal. But Zwirn will likely have a hard time replicating the incredibly good fortune he originally had with Highbridge. an Zwirn doesn’t talk a lot about his childhood. The Pennsylvania native grew up in a middle-class neighborhood in a small suburb of Pittsburgh. (His father was a hospital accountant.) An only child, Zwirn was the kind of kid who always had his head in a book. He excelled in school, especially at science, and in 1988 was one of 50 high school students chosen to attend the Pennsylvania Governor’s School for Business at the Wharton School of the University of Pennsylvania, a free ﬁve-week summer program designed to train future leaders. When it came time for college, Zwirn chose UPenn, graduating cum laude in 1993 with a BAS in computer science from its Moore School of Electrical Engineering and a BS in economics from Wharton. Before college, Zwirn says, he had wanted to be CEO of a technology company, but by the time he graduated, his interest had shifted to Wall Street. His knowledge of ﬁnance impressed David Lee, then an analyst and vice president at investment bank Lazard Frères & Co. “What stood out was his intelligence,” recalls Lee, who offered Zwirn a spot in Lazard’s analyst training program in New York. Zwirn joined the media and communications banking team and, according to one managing director with the ﬁrm at the time, was quickly viewed as having partner potential. Anthony Gellert, a fellow trainee and a longtime friend, says no one worked harder than Zwirn. He remembers how his colleague sent the entire contents of his desk and ﬁling cabinet, via Federal Express, to London in advance of a short trip there so he would have whatever he might need. At the end of the two-year program, Zwirn left Lazard to join private equity ﬁrm Madison Dearborn Partners in Chicago. (“Chicago felt like a big Pittsburgh,” he says.) A year later he moved back east to enroll in Harvard Business School. During his first year there, he cold-called every event-driven hedge fund he could ﬁnd, looking for a summer job. Thomas Kempner, co-founder of Davidson Kempner Partners in New York, offered him a position. In 1998, after getting his MBA, Zwirn took a full-time job with Davidson Kempner, eventually setting up the ﬁrm’s corporate loan business and starting its London ofﬁce. In April 2000 he left for Dell’s MSD Capital, where he put together a 12-person special opportunities team, which provided bridge loans, mezzanine ﬁnancing, structured letters of credit and other forms of lending to smalland middle-market companies. Zwirn met Dubin through Joseph Kusan, a former colleague of Zwirn’s at MSD who had joined Highbridge’s merger arbitrage group. In mid-2001, Kusan knew that Highbridge, which had been founded by Dubin and Henry Swieca in 1992, was looking to create a specialized credit opportunities business. Dubin and Swieca brought in Zwirn as a managing director and senior portfolio manager, setting him up with his own ﬁrm, Highbridge/Zwirn Capital Management, which initially operated out of Highbridge’s posh 57th Street ofﬁces overlooking Central Park. (Dubin and Swieca shared in Zwirn’s revenue.) From the start, Zwirn’s management approach was any- “Dan Zwirn and his management team took a terrible hit, and they are working hard to put it back together again.” — WARREN RUDMAN, FORMER U.S. SENATOR thing but warm and fuzzy. Employees were hired, given a phone and told to go out and ﬁnd deals. Zwirn’s main strategy was lending to small and midsize businesses, the types of companies that larger banks often overlook. Deals typically fell into one of two camps: traditional corporate loans, to everything from casino companies to small independent radio station operators, and asset-backed lending, which also ran the gamut (in one transaction a company put up antique watches as collateral). The ﬁrm even had a ﬁlm-ﬁnancing group. If assets gave off a steady revenue stream, DBZ would consider lending against it. DBZ also invested in real estate. By 2005 the ever-reaching Zwirn had begun to diversify into still more strategies, including asset-backed securities and commodities trading. Zwirn didn’t like to be told no, according to former emNOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 29

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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