Mark Rachesky (Credit: David Yellen)
When The Hunger Games: Catching Fire hits theaters this November, premiere night will be packed with famous faces. Actors like Jennifer Lawrence and Donald Sutherland. Authors like Suzanne Collins. And circulating somewhere on the red carpet among them, without drawing a single photographer's flash, will be the man who has profited from The Hunger Games more than anyone else: Mark Rachesky, chairman of Lions Gate Entertainment Corp., the movie and TV studio behind The Hunger Games, Mad Men and other big hits.
At 54, Rachesky runs MHR Fund Management, his $6 billion Manhattan investment firm that is Lions Gate's biggest shareholder, with a 38% stake, a position that has earned $1.5 billion in paper profits. Rachesky thinks it will make a whole lot more from the latest Hunger Games. "I would be very surprised if this isn't going to be a huge movie," he says.
Rachesky, however, is secretive and likes to stay behind the scenes. Hollywood is littered with money men who were lured by the glitter of the movie business only to suffer losses, but Rachesky has made a fortune at it while keeping a low profile. His latest fund has returned 13% annually since 2007 thanks to Lions Gate and investments in industries ranging from trucking to energy, and he stands to earn at least $200 million in performance fees, and maybe much more, if things continue to go well. He is also raising $2.75 billion for a new investment pool. "He is very, very competitive," says veteran Wall Street investment banker Joseph Perella, who's seen Rachesky up close in the boardroom--and on the golf course. "He really wants to win."
The former deputy of Carl Icahn, Rachesky now invests alongside his former boss, and in the case of Lions Gate, they battled against each other. Rachesky makes bets on assets that are usually in trouble, a dangerous corner of the finance game that requires him to have sharp elbows. He practices a unique style of investing that falls between fast-paced hedge fund traders and private equity players who buy companies in leveraged buyouts. Instead, Rachesky likes to buy debt and minority stakes in distressed companies in a way that allows him to exercise his will for a long time without having to pay for the privilege. Sometimes he will look like an activist hedge fund trader, buying a slug of stock and demanding board seats and management changes, as in his current investment in flailing truckmaker Navistar International. But unlike the activist traders, he will stick with an investment for years, like with his hugely successful involvement in satellite operator Loral Space & Communications, which has lasted for over a decade. At the same time, Rachesky won't go near an auction to buy a company outright.
In other words, Rachesky is a bit quirky. In his office he always tries to sit with his back to the window so he can see what's going on around him. He effortlessly draws diagrams of his investments upside down for the benefit of whoever is sitting opposite him. Rachesky is just trying to stay out of a game in which the vast majority of hedge fund traders struggle to outperform the market and buyout barons pay top dollar for companies that are widely pitched by the likes of Goldman Sachs. "You can buy less than a majority of a company and still have significant influence and control but not have to pay that vast control premium," he says in his first on-the-record interview. "I am a huge believer that either you are in control of your own investment or someone else is in control, and they are not looking out for you."
The son of a former Triple-A ballplayer who became the owner of a small photo-finishing business, Rachesky grew up playing stickball in the streets of middle-class Clifton, N.J. He ran track, excelled at math and graduated from the University of Pennsylvania in 1981. He got his M.D. in three years at Stanford University and stayed to get an M.B.A. He financed both Stanford degrees counting cards at blackjack tables in Lake Tahoe. After school he spent two years working for Robert Bass, focusing on the Texas billionaire's investment in Manhattan's Plaza hotel, engineering a profitable sale to Donald Trump. Shortly after, he went to work for Icahn. He never did practice medicine.
For six years, from 1990 to 1996, Rachesky learned his trade as Icahn's right-hand man. It was a great time to be investing in distressed companies--Rachesky helped Icahn feast on the casualties of the junk-bond boom and the S&L bust, in deals involving Western Union and the owner of 7-Eleven. The relationship was good for both of them, but Icahn understood Rachesky's desire to run his own show when Rachesky left to start MHR Fund Management. Icahn was even an early investor in Rachesky's first fund--the two played tennis to determine how much Icahn would kick in.
More than a decade later Rachesky found himself on the opposite side of Icahn. Starting in 2004 Rachesky began accumulating a significant share position in Lions Gate, at the time a struggling movie studio. In one of his first deals at MHR Rachesky had made a killing buying the beaten-down bonds of Marvel Entertainment, holding them for nearly four years as they increased in value once the company got its big Spider-Man movie franchise on track. "It opened my eyes to the value of content," says Rachesky.
New photo of Jennifer Lawrence in 'The Hunger Games: Catching Fire' (credit: Murray Close)
With Lions Gate Rachesky felt he had found a management team, led by CEO Jon Feltheimer and Michael Burns, who would aggressively build a content powerhouse. In 2003 the duo had snapped up Artisan Entertainment to help build a library, at that time, of 8,000 "movies and TV shows. But a few years into the investment the management team was under attack by Icahn, who took a big chunk of Lions Gate and complained about overspending on things like film libraries. Icahn launched a hostile bid, which Rachesky helped beat back by buying debt from the company that converted into millions of shares at $6.20 each, diluting Icahn's stake. Icahn relented after failed court battles against the board and Rachesky, who bought much of Icahn's stake at $7 per share.
As a member of Lions Gate's board, eventually serving as chairman, Rachesky signed off on the company's $413 million acquisition of Summit Entertainment, a gamble on the final two Twilight films (combined box office: $1.5 billion), as well as big investments for the first Hunger Games movie. That film earned $691 million at the box office, and Wall Street expects about $950 million for the second chapter in the series. Shares of Lions Gate have more than quadrupled in the last three years to a recent $36. "People in Hollywood wonder who he is," says Michael Burns, who holds the title of vice chairman at Lions Gate. "Mark doesn't care about the notoriety. He doesn't want his picture taken--he cares about making money."
Despite their Lions Gate battle, there are no hard feelings between Icahn and Rachesky. "He was a fast learner," says Icahn. "Since he left, we've certainly sat on opposite sides of the table more than once, but I still attend his family parties." The two are on the same team trying to turn Navistar around. Rachesky took a big stake last year after CEO Dan Ustian crashed the truckmaker by developing an expensive new engine with emissions technology that failed to work. Within weeks of Rachesky's investment Ustian was gone. Rachesky and Icahn soon grabbed board seats and lifted Troy Clarke, the company's president and chief operating officer, to the CEO spot. The stock is up 70% in 2013.
Rachesky claims he is not looking for a quick flip with Navistar; rather, he is in the stock for the long haul. He knows about endurance. Rachesky is a fitness fanatic, taking business calls while jogging, and also attends spin classes and swims laps. Arguably his best investment has been going on since 2002, when he first started buying the distressed bonds and bank debt of Loral when the satellite industry was crashing because of overcapacity. Loral both manufactured and launched satellites and leased transponders, and Rachesky liked the high barrier to entry. As the largest unsecured creditor when Loral filed for bankruptcy in 2003, Rachesky started to grab control by becoming chair of the unsecured creditors committee. "The investment strategy is, basically, 'He with the most leverage at the negotiating table wins the equity,'?" says Rachesky.
As Loral emerged from bankruptcy court in 2005, Rachesky became chairman and grabbed three of nine board seats, profiting as the company recovered, retiring some of his debt for much more than he paid and converting the rest into equity. He invested another $300 million in preferred stock to help Loral buy a majority stake in 2007 of Telesat, which has a virtual monopoly on satellite services in Canada. As the stock started to pop, some shareholders, like Highland Capital Management, complained that the relationship between Rachesky and Loral was too cozy. A Delaware judge agreed, reducing Rachesky's preferred shares and stripping them of voting rights. Nevertheless, Rachesky made nearly $2 billion in realized and paper profits, collecting distributions from dividends and from Loral's $968 million sale of its satellite manufacturing arm last year.
Still, despite the success, Rachesky knows his limits. When it comes to moviemaking, he leaves it to professionals. "If I have to cast someone," he says, "we are in trouble."
