By Anupreeta Das and Craig Karmin
Invitations to a dinner party from Bill and Melinda Gates at
their mansion near Seattle in February included an unusual request:
Wear pink or platinum. Spotlights installed for the occasion bathed
the room in a pink glow.
Mr. Gates raised his glass to toast the guest of honor, Michael
Larson, who sat nearby wearing a pink button-down shirt, his
favorite color. The Microsoft Corp. co-founder said Mr. Larson has
his "complete trust and faith," according to people who were
there.
"Melinda and I are free to pursue our vision of a healthier and
better-educated world because of what Michael has done" for the
past 20 years, Mr. Gates told about 40 dinner guests. Because of
Mr. Larson, the world's richest man said, he sleeps well at
night.
The arrangement is simple: Mr. Larson makes money, and Mr. Gates
gives it away. Since 1994, the 54-year-old Mr. Larson has managed
Mr. Gates's investment empire, mostly through a firm called Cascade
Investment LLC.
Few people know much about Mr. Gates's assets or Mr. Larson's
tactics--and the two men want to keep it that way. Real-estate
investments, which range from the fancy Charles Hotel in Cambridge,
Mass., to a 490-acre ranch in Wyoming once owned by William F.
"Buffalo Bill" Cody, are often cloaked in nondescript names to make
it harder to trace the deals back to Mr. Gates.
Cascade's headquarters are in an unmarked building in the
Seattle suburb of Kirkland. Mr. Larson is so protective of his boss
that he used to be nicknamed "the Gateskeeper," says someone who
worked with him. Employees who leave often sign confidentiality
agreements barring them from talking about Cascade, people familiar
with the matter say.
Mr. Gates's net worth has swelled to about $82 billion from $5
billion since he hired the former bond-fund manager and gave him
autonomy to buy and sell investments as he sees fit. In addition to
Cascade, which holds most of the billionaire's personal fortune,
Mr. Larson oversees the Bill & Melinda Gates Foundation's $41
billion endowment.
Cascade doesn't publicly disclose its performance results, but
people familiar with the firm say it usually churns out steady
annual gains. Because of Mr. Larson's relatively conservative
strategy, Cascade's losses when the financial crisis hit in 2008
were smaller than the 27% drop by the Dow Jones Industrial Average
for the full year, people familiar with the results say.
Since 1995, Mr. Larson has delivered a compound annual return of
11% for the Gates Foundation and two predecessors, outperforming
the S&P 500 stock index by more than one percentage point.
Mr. Gates, 58, would be worth about the same if he had kept all
the Microsoft stock he got after starting the company in 1975. Mr.
Gates owned a 45% stake when Microsoft went public in 1986. The
shares are now worth about $150 billion, excluding dividends.
Microsoft shares have nearly tripled in the past five years.
But Mr. Gates has sold nearly $40 billion of Microsoft stock
since 1994 as part of an effort to diversify his investments. The
Gates Foundation also has given $30 billion to charitable
causes.
Messrs. Larson and Gates declined to comment on their
relationship, but people who know them say it has evolved into a
bond that is crucial to the billionaire's philanthropy. Mr.
Larson's many profitable investments on behalf of Mr. Gates and
sales of some of his Microsoft shares have increased the size of
donations by Mr. Gates and his family to the Gates Foundation.
That means more money can be plowed into the foundation's
mission to fight disease and improve education in the developing
world. Bill and Melinda Gates plan to donate 95% of their wealth to
the foundation, the world's largest philanthropic organization. In
addition to $28 billion from Mr. Gates, its endowment includes $12
billion in gifts from Berkshire Hathaway Inc.'s Warren Buffett.
"They're not two buddies, for sure," says Steve Walsh, former
chief executive of Legg Mason Inc.'s Western Asset Management unit,
about Messrs. Gates and Larson. They rarely mingle socially, people
close to them say.
Mr. Walsh says he was struck by how much effort Mr. Gates put
into the dinner party for Mr. Larson at the former Microsoft chief
executive's 66,000-square-foot mansion on the edge of Lake
Washington. The reference to platinum on the invitations was a nod
to the metal's 20th-anniversary symbolism.
"It was almost tender--and endearing," says Mr. Walsh, who has
known Mr. Larson for decades.
The Wall Street Journal pieced together a snapshot of Mr.
Gates's investments from interviews with more than two dozen people
familiar with Cascade, securities filings that detail some holdings
of the firm and real-estate records. Few of Cascade's investments
have been publicly announced.
The Wyoming ranch is part of a bet by Cascade on the steep
rebound in real-estate prices since the financial crisis. The firm
owns at least 100,000 acres of farmland in California, Illinois,
Iowa, Louisiana and other states--or an area seven times bigger
than Manhattan.
Cascade also owns more than $24 billion of shares in companies
such as Canadian National Railway Co., AutoNation Inc. and Republic
Services Inc. The holdings reflect Mr. Larson's value-conscious,
buy-and-hold philosophy, mirroring Mr. Buffett, a close friend of
Mr. Gates. Canadian National shares are up 207% in the past five
years.
While much of Mr. Gates's money is in stocks, Mr. Larson has
plowed smaller chunks into private equity and other types of
adventurous, so-called alternative assets, according to people
familiar with the matter. Sizable bets on the bond markets have
been reduced recently.
Some investments have been duds. In 2007, Cascade and other
investors bought a 13% stake in PlanetOut Inc., the publisher of
Out magazine and a cruise-line operator targeting gays and
lesbians. The company's shares soon sank, and it sold some assets
and was acquired by another firm in 2009.
Surprisingly, Mr. Gates has few technology-related investments.
As of June 30, he held a 3.6% stake in Microsoft, worth about $13.9
billion based on Thursday's closing stock price.
Mr. Gates makes his own tech and biotech investments, which
aren't held by Cascade. He started digital-image company Corbis
Corp. in 1989. Smaller investments include stakes in
nuclear-reactor developer TerraPower LLC and meat-substitute maker
Beyond Meat.
Mr. Gates is updated on all the other investments every other
month. "At the end of the day, all decisions go through Michael,"
says Mike Jackson, chairman and CEO of AutoNation, who considers
Mr. Larson a friend. Mr. Larson is a director of the auto retailer,
and Cascade owns a 14% stake in AutoNation valued at about $841
million.
Mr. Gates decided to hire Mr. Larson after the Journal reported
in 1993 that the entrepreneur's money manager at the time had
previously been convicted of bank fraud. Mr. Gates was a close
friend of the money manager and already knew about the conviction,
the Journal said, but began looking for someone new after the
uproar.
After an extensive screening process, a recruiter invited Mr.
Larson to meet Mr. Gates. The money manager had worked for a
mergers-and-acquisitions firm and run bond funds for Putnam
Investments, now a subsidiary of Canadian insurer Great-West Lifeco
Inc., before striking out on his own.
The two men hit it off. Mr. Gates was impressed by Mr. Larson's
self-assured yet low-key personality, people familiar with Mr.
Gates's thinking say.
After taking the job, Mr. Larson decided to go "off the radar,"
says Roger McNamee, a co-founder of Elevation Partners, a Silicon
Valley firm that was an early investor in Facebook Inc. He says Mr.
Larson believed a low profile was the best way to approach such
high-profile investing following the bad publicity about his
predecessor.
Mr. Larson farms out more than $10 billion in assets at any
given time to roughly 25 outside money managers, partly as a way to
drum up new investment ideas. The outsiders aren't told any
nonpublic details about the size of Mr. Gates's portfolio or its
holdings, people familiar with the matter say.
A news release announcing last year's acquisition of the
Ritz-Carlton in San Francisco, a neoclassical gem in Nob Hill,
identified only Cascade's co-investor in the $161 million purchase.
A publicist for the Charles Hotel said she had no idea Mr. Gates is
a co-owner of the hotel.
"It's an extraordinary tribute to Michael that if you think
about Bill Gates and his reputation, you never hear about Cascade,"
Mr. McNamee says.
Married with three children, Mr. Larson prefers Levi's jeans and
dark pink shirts. Some current and former employees say he can be
brusque and controlling, even deciding the seating chart for the
investment firm's annual holiday party.
James Floyd, chief investment officer at Claremont McKenna
College, a liberal-arts school in California from which Mr. Larson
graduated in 1980, says he is "brutally honest, but in a refreshing
way. You know exactly where you stand with him." Mr. Larson advises
the college's investment committee.
Cascade employees are expected to be frugal. Even though Mr.
Gates owns nearly half of the Four Seasons Holding Inc.
luxury-hotel chain through Cascade, the investment firm's
executives stay at less-expensive hotels, even when traveling on
Four Seasons business.
The $3.8 billion acquisition with Saudi Arabia's Prince Alwaleed
bin Talal came in 2007 near the real-estate market's peak.
"There's a symbolic value to continually reminding their
partners that Four Seasons is a financial investment, not an ego
investment," says Philip Maritz, co-founder and president of hotel
investment firm Maritz, Wolff & Co. He sold the Four Seasons in
Houston to Cascade last year.
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Mr. Larson also is known as a golf nut who enjoys networking
more than working on his backswing. People who know him say he puts
immense value on personal relationships, cultivating them with an
intensity that can feel tiring.
He attends Allen & Co.'s big-name conference in Sun Valley,
Idaho, with Mr. Gates.
Bill and Melinda Gates also attend Mr. Larson's daylong
round-table discussion held every December in Cascade's conference
room. Invited high rollers from the finance and corporate worlds
discuss themes and topics for the year ahead. Recent guests include
Liberty Media Corp. Chairman John Malone, TPG co-founder David
Bonderman and Edward Lampert, the hedge-fund manager who is CEO of
Sears Holding Corp.
Cascade has grown to roughly 100 employees, compared with 1,200
at the Gates Foundation. Mr. Larson likes to hire recent Claremont
McKenna graduates. Employees are discouraged from using Facebook,
Twitter, LinkedIn and other social media--and from sending email
from their work accounts to outsiders who aren't business
partners.
In 2009, Mr. Larson dispatched a 25-year-old Cascade employee to
negotiate the purchase of multimillion-dollar mansions in Jupiter
Island, Fla., hoping the firm could squeeze bargains out of
homeowners burned by Bernard L. Madoff's massive Ponzi scheme,
people familiar with the matter say.
The employee was told to say he worked for a Cascade subsidiary
called Front Range Investment Holdings LLC, not Cascade or Mr.
Gates, these people say. The employee nailed down the purchase of
one mansion for $5 million, real-estate records show. It was on the
market for $12 million in 2008.
Front Range is described on the deed that recorded the purchase
as a Colorado limited liability company, and other public records
include an address at a post-office in Kirkland, Wash., where
Cascade in based.
Online real-estate firm Zillow Inc. estimates that the
four-bedroom, nearly 12,000-square-foot "European villa" with a
private dock is now worth $6.4 million. The mansion is for sale for
about $5.3 million. Cascade is willing to walk away with a small
profit.
Write to Anupreeta Das at anupreeta.das@wsj.com and Craig Karmin
at craig.karmin@wsj.com
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