Equitable

"We got paid a 2 percent management fee, which paid our salaries and overhead. On the $ 100 million, that was $ 2 million a year. We had offices and several people to pay. We were comfortable, but not getting rich on our salaries. We didn’t make any money above the management fee until we paid Equitable an 11 percent hurdle rate of return. If we cleared an 11 percent return, we started sharing 20 percent of the profit. In reality, we had to earn back the 2 percent management fee and the 11 percent return, so actually our hurdle to clear was more like 13 percent. That return was calculated annually, so we had to earn that every year. That wasn’t easy."

"Early in 1989, I went on the payroll of NGP even though I was still a student. David Albin was on board as the leader of the team based in Greenwich. Working there, too, was a former managing director at First Boston (now Credit Suisse) named R. Gamble Baldwin. Late in the summer, around the same time that the first Equitable meeting was coming together, Richard had called Gamble after reading an Institutional Investor magazine article that rated him the number-one analyst covering the natural gas industry. “How would you like to retire from the banking game, Gamble?” Richard had asked on a cold call to him. “I have these guys, and we may get this money, and I think they’ll need an adult around them.” I think Richard just liked the shock value in cold calling folks."

"Richard said, “We can go through this whole study if you want.” I was petrified but ready to spring into action. Unbeknownst to me, however, Equitable had sent down the senior-most guys from New York, not the grunts, to go through the plan. They were not about to wade through three-inch binders full of analysis. My books could have been the Dallas phone book. Nobody opened them or looked at them. I don’t remember if they even took them! Everyone just talked, and then it was over."

"That is how Richard worked. He was the proverbial “train that was leaving the station” and you had to decide if you wanted to be on or not. Richard had made up his mind that it was the right time to put some money together to buy natural gas assets low and then later to sell high. Equitable had come down to Texas to do its due diligence on the investment team."

"It’s important to note that the fund management business works quite differently today. Now, when we raise a fund, investors pledge capital to invest, but the money doesn’t go in until the management team calls for it. The hurdle-rate meter doesn’t start clicking until the capital is called. However, back in 1988, Equitable wired us all the money, and we had that 11 percent annual hurdle-rate meter clicking every day. Plus, we had to pay back our annual 2 percent management fees before earning any incentive compensation. By standing still, we were actually going backward in terms of getting closer to earning our percentage of the profits."