The successful past of one of NYC Private Equity s best individuals
Carl B. Hess, the founding chair and long time leader of AEA Investors, an innovating private equity business as well as a forerunner to the leveraged-buyout titans of the 1980s, passed away on Feb. 15 at his residence in Manhattan aged 98.
AEA started as American European Associates in 1968 with $15.4 million in start-up funds by the Mellons, Rockefellers and Harrimans and S. G. Warburg & Company, Siegmund Warburg's UK-based investment bank. Their mission was to buy-out battling companies whose fortunes could be corrected with an infusion of funds and sturdier management.
Under Mr. Hess they evolved into "a super rich club for ex- Fortune 500 CEOs," as Ron Chernow stated in "The Warburgs: The Twentieth-Century Odyssey of a Remarkable Jewish Family" (1993).
The company's stockholders were organisational investors and past execs of the USA's greatest corporations. Membership had been by invitation exclusively and requested an official commitment to deliver funds on demand. Stakeholders provided their management expertise to help transform underperforming companies, an endeavor aided by the company's approach of keeping minimal debt.
The system ended up being notably profitable, as AEA acquired medium and small-scale companies of any classification -- steel mills, pencil makers, department stores -- and then built them up and traded them at a profit.
"We prefer to acquire a company which has a type of product of its own or a major status in a market, yet which is underperforming," Carl Hess told Business Week back in the 70s, in an uncommon announcement to the media. "We are only enthusiastic about capital formation for, and capital growth of, developed enterprises.".
Hess, whom disliked his middle name and kept it a secret, was born on Oct. 28, 1912, in Chicago. Becoming an adult, he went to the University of Chicago lab schools. Upon completing an undergraduate degree in history from Dartmouth in 1934, he started at Brasco, a Chicago manufacturer of metal shops.
His first relationship, to Juliet Forbes, ended in divorce, and his second wife, Desanka Pavlu, died in 1990. In addition to his partner, he is survived by a son, Eric, of Scottsdale, Arizona.; a daughter, Safiya Bonaventura, of Aptos, California.; 5 grandkids; and 1 great-grandchild.
In 1950, he was designated to the freshly established role of director of development at Cresap, McCormick & Paget, undoubtedly one of the largest management expert firms in the USA, in which he became an associate before relocating to the American Securities Corporation, that managed the William Rosenwald personal fortune, produced by Sears, Roebuck.
He had been an executive of the firm when Siegmund Warburg, keen to broaden his influence in NYC, had a meal in an exclusive dining room at the Rockefeller Center in November 1963 with J. Richardson Dilworth, the money executive for the Rockefellers, and George H. Love, the chief executive of Consolidation Coal and the Chrysler Corporation.
A surreal strategy took shape: a combining of European and American capital generated from wealthy families and individuals eager to go after what was then known as the capital reform company. The three decided to proceed and raise capital, and a little over four years later American European Associates was established, with Mr. Hess as chairman and president.
The new enterprise got off to a rough launch. Their first buy out, a Los Angeles producer of recreational equipment called the Leisure Group, revealed a decline of $31 million on profits of $57 million in 1971. Mr. Warburg, outraged, attempted to oust Mr. Hess but was hindered by Mr. Love, whereby he traded his part of the business at 10c/share.
Mr. Hess recouped swiftly. In 1973, he purchased General Adjustment Bureau from a conglomerate of insurance firms for $18 million. This time, he made sure of adding AEA investors on the business's executive. A couple of years after the business was bought by UAL, the parent company of United Airlines, for $40 million.
By the Eighties, while AEA had been executing over $1 billion in deals, investors buying into the company ended up paying $150 per share for the benefit of association. In 1998 the price had increased to $250.
Mr. Hess functioned as chairman and president until 1989, when he became chair of AEA's executive board. John C. Whitehead, an ex co-chairman of Goldman Sachs, followed him as chair, and Vincent Mai Cranemere CEO, a partner at Lehman Brothers during that time, became chief exec.
Hess became chairman of emeritus in 2000 and remained active in the business up until a few weeks before his passing. The corporation, and Mr. Hess himself, operated quietly, averting the press and drawing in no attention even throughout the leveraged-buyout mania of the 1980s.
In "The Zeroes: My Misadventures in the Decade Wall Street Went Insane" (2010), Randall Lane described a 2006 interview with Carl Hess. "Few at the Four Seasons recognized the identity Carl Hess, and still much less identified the man," he said. Lane thought this humorous, since, he added, perhaps with a touch of hyperbole, "Hess was the last man alive who could take credit for developing the aspect that had been guiding each conversation in the room: private equity."
