Sunset on 57th Street
The end of an era for the asset management industry.
Walking West on 57th Street in Manhattan on an unseasonably warm winter day, five chattering men in slim, dark suits turn toward the famous sloping glass tower. On one of New York’s grandest cross streets, they turn at the six-foot-high, playfully chubby red number 9 that marks their destination. As the men circle through the revolving doors of 9 West 57th Street and into the security line, their voices lower and they discuss the throngs of tourists and police attracted to midtown by then–president-elect Trump and his skyscraper a few blocks away. “The guys here say sirens now go off all day long,” says one, “and you can barely move at lunchtime.”
The men are investment bankers, and they quiet as employees who work in the building hustle by them, waving their insider credentials at a gold button lodged in travertine marble at the security guard station. A Giacometti sculpture — worth a reported $20 million — from the art collection of the building’s owner, Sheldon Solow, looks almost carelessly placed before the elevators. It’s a spare space for one of the most prestigious office towers in New York, one that houses titans of asset management including KKR & Co.’s Henry Kravis, who helped create the private equity industry. Tenant Leon Black learned his trade under junk bond king Michael Milken and co-founded Apollo Global Management’s predecessor firm in the 1990s. Other 9 West denizens were equally prescient about the future of finance, including Silver Lake Partners co-founder Glenn Hutchins, who set up the New York office as an annex to the technology investment firm’s Menlo Park, California, headquarters. Another 9 West tenant, Daniel Och, former head of proprietary trading at Goldman, Sachs & Co., started Och-Ziff Capital Management Group in 1994, when hedge funds were still a cottage industry.
The visiting bankers — perhaps at 9 West to meet one of these industry luminaries — get through security and over to the only place in the lobby to buy mints or a snack. Tucked behind a wall is a cramped deli with premade sandwiches and a lackluster salad bar. The bankers buy sodas. They take over an IKEA-style white table and metal chairs, and begin loitering — an activity that’s clearly not encouraged. Even so, they have arrived very early in a transparent attempt to run into one of the building’s deal makers before their meeting. “No matter the time, I see groups of them every day without fail in the lobby,” says a former banker.
As the present group of bankers waiting in the lobby attests, the basics never change. Finance is the grease for other businesses that have patents or manufacturing plants; finance has its people and their relationships. Always, 9 West has been a place where the powerful attract one another and the wannabe powerful want a chance to become more powerful. “Where smart people in their 20s want to go and drink and talk and meet each other is often the best place to staff up a financial organization, and Manhattan around 9 West was one of those places,” says Josh Gotbaum, who was a Lazard banker when KKR took over RJR Nabisco in 1988. The deal forever demonized private equity. HBO immortalized the takeover in the movie version of Barbarians at the Gate, which chronicled the backroom dealings — many of which took place at 9 West.
The address became an aspiration for early hedge fund leaders. When the industry was in its infancy in the early 1990s, Glenn Dubin and Henry Swieca, investors with Paul Tudor Jones II and Louis Bacon, moved their fledgling Highbridge Capital Management out of the General Motors Building a few blocks away and into 9 West. “Going from the GM Building to 9 West back then was as much a psychological as a geographical move,” says Joseph Rosen, who was Highbridge’s founding CIO and head of quant research, and now works for insurance tech start-up Extraordinary Re. “I’m overstating here,” says the fast-talking Rosen, a former member of the Israeli Defense Forces, “but it was almost like crossing to the other side of the tracks. It’s hard to imagine now, but few even knew what a hedge fund was then. Being in 9 West was moving on up.”
Building owner Solow has added to the mystique. Prohibiting photographs, he leases only to elite tenants willing to pay the rack rate, which can be $200 per square foot. Compared with the neighborhood’s $119-per-square-foot average asking rent, according to CBRE, 9 West offices command an 68 percent premium. That can mean space remains empty. When the sun hits just right, workers in offices across 57th Street can see whole floors of 9 West without window shades or furnishings, says a senior private equity executive. He’s right: This piece of prime real estate is only 64 percent leased, to 26 tenants, according to a 2016 Fitch report. The ground floor, blocks away from stores like Bergdorf Goodman, has no retail. Instead, the glass-fronted gallery operated by the Solow Art & Architecture Foundation shows off works by Franz Kline, Matisse, Alexander Calder, and others. When asked how to enter the space, a lobby guard shrugs in its direction and replies, “Dunno.”
The gallery has never opened to the public; its pale gray carpeting indicates as much. Solow has done little to revamp 9 West over the years. “I never understood the big whoop about the building,” says one real estate veteran. “But then you look out at the view and you realize he just has to keep it clean and not falling apart.” She says 9 West is “everyone’s favorite Class B building in a Class A location.”
Built in 1974, the 50-story Solow Building was designed by Gordon Bunshaft of Skidmore, Owings and Merrill. As with 9 West’s sister building on 42nd Street, the signature façade swoops upward from the base, softening the skyscraper’s presence on the streetscape. Above the 23rd floor tenants get full views of Central Park that even real estate pros call jaw-dropping. Earlier this year skaters could be seen gliding in miniature at Wollman Rink. Even if a financier has made it to West 57th Street, it’s the top ten floors of number 9 that signal definitive success.
It’s time to make the pitch. The bankers push back in their white metal chairs, snap shut their silver laptops, and head as a clique to the elevator bank serving floors 40 to 50 — the high rollers. A few others file into the car and everyone falls silent, earnestly protecting their secrets. The doors open on a wood-paneled anteroom. A guard stands in an alcove, peering through a window cut out of the wood panels. Bennett Goodman, co-founder of GSO Capital Partners, now part of Blackstone Group, remembers the first time he was in KKR’s offices — and the vista. Goodman was restructuring some debt on the RJR Nabisco deal with investment banking firm Donaldson, Lufkin & Jenrette in the early 1990s. “Having an office at 9 West 57th, with its priceless views of Central Park, wood-paneled offices, and private dining rooms, was a pretty clear sign of success,” he says.
A year after construction on the tower finished, New York almost declared bankruptcy. The Daily News ran its infamous headline: “Ford to City: Drop Dead.” That was the New York in which Jerome Kohlberg Jr., Henry Kravis, and George Roberts founded KKR a few years later. The term “private equity” didn’t then exist and finance was still a niche and boring industry, at least outside the city. KKR’s founders were lucky to be at the center of trends that reshaped asset management: pensions needing fatter returns to pay accumulating promises to retirees, and sovereign wealth funds like the Qatar Investment Authority — a 9 West tenant — moving their oil money into alternatives. Corporate America was also changing. KKR targeted companies that had never acquiesced to shareholders, using Milken’s junk bonds to buy and revamp them. Outsiders like Kravis were changing Wall Street’s traditions. The 9 West address lent insider status.
A year after the stock market crash of 1987, RJR’s chief executive proposed a management buyout that prompted a feverish battle for the company. KKR won with its $30 billion hostile bid. Bankers made $386 million in fees on the deal, and the prospect of similar rewards continues to fill 9 West’s lobby with dark-suited loiterers.
The bear market that started in 2000 wasn’t bad for 9 West’s tenants. After the downturn institutions started loading up on alternatives, emulating David Swensen, chief investment officer at Yale University, who had protected the endowment during the rough period. Though they paled in comparison with the returns of tech funds in the ’90s, Highbridge’s 16 percent average annual returns started looking pretty good. When Leon Black was chairman of the Museum of Modern Art’s endowment investment committee, the group gathered four times a year in one of Apollo’s 9 West conference rooms, a few blocks from the museum. The endowment, which in 2002 had one quarter of its money in hedge funds, including Och-Ziff, had returns that were three times those of the average foundation or endowment.
During an early evening tour of the Solow Building, an executive shows off a darkening view of New York from outside Apollo’s lobby on the 43rd floor, where the company moved in 2004. The marble floor and furniture came from one of Apollo’s distressed investments that later went into bankruptcy. A sculpture of the firm’s Greek god namesake adorns a table. “The question in these places is, How much of the view is given to the lobby, or do the top guys take it for their office?” asks the executive.
Ding. The twilight tour continues. The elevator doors open on Och-Ziff’s recently renovated space. The furniture is minimalist, drawing the eye through the lobby to the view. An open stairway surrounded by glass connects with Och-Ziff’s space on the floor below. Ding. The doors open on Chanel’s floor. The distinctive logo of interlocking C’s is woven into a gray rug. A photo of Coco Chanel adorns one wall. Ding. An unassuming black door bears a small sign for Mousse Partners, the family office founded by Charles Heilbronn, a member of the Wertheimer family, which owns Chanel. The sky darkens.
The tables at Brasserie 8½, in the building’s basement, have a generous amount of space between them. At their power lunches executives can speak freely in the quiet, tiered bar and restaurant, without easy eavesdropping by dining neighbors. The midcentury tulip cocktail tables and psychedelic bar tiles evoke a more carefree era. A hidden elevator down a few steps from the bar brings the billionaires from upstairs directly down to the restaurant.
During a recent lunch at a half-empty 8½, former Highbridge CIO Rosen — who has spent his career watching technology transform the financial industry — says moving to 9 West wasn’t just about prestige. Funds needed buildings that could support their technology. “Our needs were laughable compared to what they would need today, but it was the first time that hedge funds had to think about space and infrastructure for their machines as well as their people,” he explains. While Rosen talks, a waitress in traditional black and white garb hovers off to the side. He laments that the restaurant hasn’t changed much since he ate there years ago.
Since some of the first major alternatives firms grew up in 9 West, hedge funds have proliferated and private equity firms have made multibillion-dollar deals that put the RJR record to rest. One such fast-growing operation, Providence Equity Partners, signed a lease for $200 a square foot in 2007, at the market’s peak. When the financial crisis unfolded a year later, deals unraveled, hedge funds refused to return investors’ money as their holdings tumbled in value, and institutions were again questioning how they should invest.
But money managers ultimately came out on top. As banks pulled back from the markets, managers became the new source of capital. In the 1980s many of these executives were involved in inventing the junk bond; in the 1990s they institutionalized the leveraged finance business. Now they have reinvented the concept of lending to troubled companies altogether, this time as asset managers.
The industry is changing again, and with it Manhattan’s commercial districts. Margins are threatened as investors rail against hedge fund fees and move to lower-cost index funds. Cynthia Wasserberger, a managing director at Jones Lang LaSalle, says the amount of money that the hedge fund industry manages correlates with rents for New York’s trophy buildings. Hedge fund assets grew modestly in 2016, but trophy rents dropped by 2.8 percent, she says.
Trying to adapt, asset managers are becoming part tech firms, part finance shops. Hudson Yards, the largest real estate development in New York City’s history, is drawing financial companies large and small with its new construction and cutting-edge infrastructure. As big data and machine learning edge out Modern Portfolio Theory, managers are using Hudson Yards to recruit the next generation. “Together, 30 and 55 Hudson Yards are almost a West Side version of 9 West,” laughs Bob Alexander, CBRE’s chairman of the tristate region. Hudson Yards’ tenants include Wells Fargo & Co., Boston Consulting Group, Steve Cohen’s Point72 Asset Management, and hedge fund firm Third Point.
KKR will be leaving its elegant 9 West offices for Hudson Yards, where it will own its space. True to the firm’s investment core, KKR’s Hudson Yards stake has already appreciated in value, real estate agents say.
Kravis wanted open spaces for teams to work together and a hip environment to attract young people, who may be more drawn to Silicon Valley’s ball pits than to finance’s mahogany walls. The new home of Silver Lake, whose investments fueled tech giants like Alibaba Group Holding and Skype, will be next door to BlackRock, which long ago figured out that technology would be key to its margins.
“Hudson Yards has attracted global leaders in media, fashion, beauty, tech, law, and finance, and is quite literally moving the city’s center of gravity west,” says L. Jay Cross, president of Related Hudson Yards. “The CEOs who have chosen to relocate to Hudson Yards — many moving from what were long considered the best buildings in New York City — love that they’re going to be in the thick of creating a new neighborhood.”
Rick McVey, CEO of electronic fixed-income trading platform MarketAxess, has seen a lot of Manhattan in his career. He’s gone from working on J.P. Morgan’s bond-trading desks to creating a start-up electronic platform at LabMorgan during the dot-com boom. Soon McVey will be far from Wall Street but in the thick of the new development, where financial technology firms hope to mature and veteran asset managers will look to reinvent themselves. “A whole new city is going up here,” says McVey, his excitement evident. MarketAxess’ future home will have its own power system, including solar; hidden and silent heating and cooling machinery; and open outdoor spaces throughout. “We’re a tech company that wants to attract millennials. They’re all living downtown and don’t want to be on old-school Park Avenue.”
When 9 West opened, finance dominated New York but was still somewhat hidden, as its captains sought low profiles. Innovations like junk bonds cracked the status quo, upending the industry. A new generation is defining the future again.
In a few years Kravis will exit 9 West for the last time. On 57th Street the financial world shifted toward him and KKR. Now he’s shifting with it.