A private-equity politician whose name isn’t Romney
By Thomas Heath,
It is difficult to create and build a business, so I respect anyone who pulls it off.
John K. Delaney, 48, who is the Democratic nominee for Maryland’s 6th Congressional District against 10-term Republican Roscoe Bartlett, has done it three times — and made at least $264 million doing it.
His campaign embodies some of the issues and characteristics swirling around the race for president: a hugely wealthy entrepreneur who drew on the private-equity world to build his company. Delaney, running on his expertise in finance and as a can-do executive, is unapologetic about his success and has given away millions to charity.
If he wins, Delaney will instantly rank as one of the wealthiest lawmakers in Congress, and likely position himself as an influential voice on national banking and financial issues.
A spokesman for the Bartlett campaign declined to comment.
Delaney’s first venture was HealthCare Financial Partners, which he launched in 1993 with Ethan D. Leder and Edward P. Nordberg Jr., classmates at Georgetown University Law Center. HCF lent money to health-related companies such as nursing homes, small hospitals and large doctor’s offices.
Delaney helped run the company for six years, served as chief executive, took it public on the New York Stock Exchange and helped guide its sale in 1999 to Heller Financial for about $500 million. The three founders pocketed $40 million each.
Delaney and partner Jason Fish then started CapitalSource in 2000 with an ambitious goal: making loans, from a few million dollars to more than $100 million, to mid-size businesses. Their borrowers included the restaurant chain Au Bon Pain, shoe retailer Jimmy Choo, a messenger-bag company and Exclusive Resorts, former AOL mogul Steve Case’s vacation club.
“We started CapitalSource because large banks were ignoring small to mid-sized businesses, and we saw a big business opportunity as a result,” Delaney said.
With Delaney at the helm, CapitalSource has gone through several iterations, starting as a health-care lender, becoming a publicly traded company, transforming itself into a real estate investment trust and surviving the financial crisis by acquiring a California bank — with its access to low-cost savings deposits.
“CapitalSource is still the same company, but we now operate out of a bank, which gives us low-cost and stable funding,” Delaney said.
So far, he has accumulated $224 million from his interests in CapitalSource (at the company’s share-price peak, the value was $306 million), according to CapitalSource and to a Washington Post analysis, which was performed by Equilar, a compensation consultant.
Delaney earned an average annual income for 2004-10 of $14.5 million, according to a summary he released to the public this year. His average federal income tax rate for those years was 17.3 percent.
He is on an unpaid leave from his executive chairmanship at CapitalSource while he campaigns for Congress, but he hasn’t fully stepped away from his businesses. His latest entrepreneurial venture is Chevy Chase-based BancAlliance, a network of more than 50 banks from 26 states, which is backed by giant asset manager BlackRock.
Delaney has a sprawling house in Potomac, as well as homes in Rehoboth, Del., and Sun Valley, Idaho. He throws one of the highest-profile Christmas parties in Washington, peopled by chief executives, Supreme Court justices, private-equity bigwigs, politicians, philanthropists, government managers, journalists and religious leaders.
His charitable gifts in the past seven years amount to $19 million, Delaney says. He has a family foundation, and his name is on a professorship at Georgetown Law, from which Delaney and his wife, April, graduated and where he serves on the board of trustees.
The son of an electrician who grew up in a two-family house in northern New Jersey, Delaney is well-connected, and counts among his closest friends Atlantic Media’s David Bradley and the Office of Management and Budget’s acting director, Jeffrey Zients, who has been a Delaney business partner.
Delaney and his early investors in CapitalSource, which include respected private-equity firms such as Farallon Capital of San Francisco and Madison Dearborn Partners of Chicago, earned several times their investment.
Investors who bought CapitalSource shares at their IPO and held them until today would have fared better if they had placed the money in an S&P 500 index fund.
The S&P total return from 2003 until recently is about 49 percent including dividends, compared with 1.15 percent total gain for CapitalSource including dividends. Someone who invested in the S&P Financial Index, which tracks financial companies, would have experienced a total decline of 20 percent, which is far worse that both the S&P Index fund and CapitalSource.
CapitalSource shares closed Friday at $6.89, less than half of the $14.50 price per share that it sold for in its initial public offering nine years ago.
Delaney prefers to be compared with his competitors in the financial sector.
“By any measure CapitalSource outperformed both our direct competitors and the financial services industry in general, particularly in the context of the near collapse of the financial services industry where 19 of the 20 largest financial institutions in the country either failed or were bailed out by the government,” Delaney said in an e-mailed statement. “The company is strong, performing very well, and received no government assistance.”
The reason he and his early investors did so well is because they took the initial financial risks to put the money in the company and build it. Delaney and co-founder Fish invested their own money (Delaney put in $5 million) and time — known as “sweat equity” — to build the company. They were rewarded with millions of stock shares purchased at a price far below that paid by later investors.
It’s not uncommon for founders of public companies to be paid in stock and then sell those shares on the open market. Founders and early investors in AOL, Microsoft, Facebook, Zynga and thousands of other companies have done the same.
At the time that CapitalSource went public, Delaney owned 8,822,664 shares, equal to 7.6 percent of the company, according to Securities and Exchange Commission documents.
At the IPO price of $14.50 per share, Delaney’s 8.8 million shares immediately conferred a value, on paper, of $127,609,628.
He didn’t sell any of the shares at the IPO because he agreed to hold on to the stock — a contract known as a “lockup” — for six months after the IPO.
In February 2004, about six months to the day since the IPO and after the lockup expired — Delaney sold 1.5 million shares at $21.50 per share, netting him $33,697,358, before taxes.
Delaney had sold stock on dozens of occasions over the years, netting $91.7 million in all. About $65 million of that was for stock Delaney directly owned, while about $27 million was for stock sold by Delaney’s trusts.
Since the financial crisis, many of CapitalSource’s business lines unrelated to the bank have been sold or shut down, the network of loan production offices has been trimmed, and while the company is waiting for approval of regulators to become a bank holding company, it is different from the broad-based commercial finance company it was when it began.
As of December, CapitalSource had grown to 569 employees, including 218 in Chevy Chase. That’s up from 225 at its IPO.
Delaney still owns millions of shares of CapitalSource stock, but he has lost $82 million — on paper— because of the drop in share price.
To read previous Valued Added columns, go to postbusiness.com.
More business news coverage: - Huawei expands lobbying amid national security probe by Congress - Key economic data for the eweek of Aug. 27 - Adam Chasse: The new COO of RxTrials - Read more on PostBusiness