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RAINWATERCan He Recoup?It's early October, and Richard E. Rainwater should be in dealmaking heaven. The stock market has just wrapped up its worst three-month performance in eight years. Investors are worrying about hedge-fund losses, emerging-market collapses, even a U.S. recession. For an investor like Rainwater, it's a classic opportunity. A teenage Texas drag racer turned Wall Street legend, he built a billion-dollar-plus fortune by buying into beleaguered businesses at discount prices, sometimes cutting four or five deals over several phone lines simultaneously. But on this breezy fall morning, the 54-year-old Rainwater isn't doing deals. He isn't trying to find his next Walt Disney Co. or Honeywell Inc., to name two companies he bought when they were cheap. Rather, Rainwater is looking for Doodle--his and wife Darla D. Moore's puppy, who has escaped from the play area of their condo on New York's Upper East Side. An elevator excursion down to the private terrace quickly reveals that the four-month-old keeshond is safe and sound. And as he plays fetch with his pup, the ever cool, laid-back Rainwater--clad in polo shirt, khaki shorts, and tasseled loafers with no socks--appears in no hurry to return to the financial fray. Sure, Rainwater sees opportunities. ''There's no telling how much money I could make going out and doing deals right now,'' he says. But Rainwater just can't get excited. ''I've never had so much liquidity at such a time of great opportunity--and had so little interest,'' he says calmly. ''I just don't feel the obsession or the passion to go out and do another deal or create another company....After 30 years, I'm out of the deal business.'' Indeed, Rainwater's enthusiasms now run more to golf and such good works as financing a school for disadvantaged children in his hometown of Fort Worth. For four years, Moore, a former Chemical Bank executive, has been managing his billion-dollar investment portfolio. And since February, Moore and Rainwater's long-time partner, John C. Goff, have been handling new deals. But there's a problem: Rainwater's empire is a mess. His huge bets on three sectors--energy, real estate investment trusts, and health care--''are all in the crapper at the same time,'' says pal Henry R. Silverman, chairman and CEO of Cendant Corp., though he feels that Rainwater's bets will eventually pay off. Since January, Rainwater says, his net worth has fallen 29% to $1.2 billion. His real estate investment trust, Crescent Real Estate Equities Co., has pulled out of more than $2 billion worth of deals since July, prompting lawsuits from two prospective partners. STICK WITH IT. With his reputation as a rainmaker at stake, Rainwater is spending more time on damage control. He's turning up the heat on managers of his companies to cut costs. And after his wife asked for help, Rainwater has played a more direct role in managing his investments. ''Darla doesn't have the skill set to manage in chaotic markets,'' he explains. One gets the sense Rainwater is trying to work less and play more, but he can't just yet. ''I've always had this philosophy that if you start something, you stick with it,'' Rainwater says. ''I'm retiring from doing any more deals, but I'm not retiring from taking care of the old deals that I'm still responsible for.'' There's a lot of damage to undo (charts, page 114). Crescent, Rainwater's REIT, stumbled badly when it ventured from office buildings into gaming and health care; its stock price has dropped 44% from its 52-week high, to under $23. Sister company Crescent Operating Inc. has plunged to under $4, from $24 at its initial public offering in June, 1997. Depressed oil prices have battered shares at Pioneer Natural Resources Co., the successor to corporate raider T. Boone Pickens' Mesa Inc., which Rainwater rescued from the brink of bankruptcy in June of 1996. It has fallen 57% from its 52-week high, to under $15. Ditto at oil-drilling firm ENSCO International Inc., down 71% from its high. Rainwater's medical investments are in intensive care: Magellan Health Services Inc., which runs psychiatric hospitals owned by Crescent, is down 66% from its high, to $10. Columbia/HCA Healthcare Inc., Rainwater's hospital company, has tumbled 37%, to under $22. The company is the target of a federal healtH-care fraud probe. Even the stock of Fresh Choice, Inc., a 54-unit restaurant chain that Rainwater owns an interest in, has slumped this year, from 3 to 1 1/2. ''Some of the magic that had been associated with Rainwater is gone,'' concedes Andrew A. Davis, portfolio manager of Davis Real Estate Fund in Santa Fe, N.M., which jumped into Crescent Real Estate Equities at its 1994 IPO. ''It was a buy-the-guy play,'' says Davis. ''We knew he had done some great things professionally. We respected his enthusiasm and intelligence.'' Davis still owns Crescent, but other investors are less forgiviNg. Says Michael R. Spohn, principal of energy-research company Petroleum Group Inc.: ''I think [Rainwater's] halo has tarnished.'' NOT SO BAD. For his part, Rainwater stands by his record. ''People are correct in that we have made mistakes,'' he says. ''But that happens all the time. There are some things we did at every company I've ever been associated with--Disney, Honeywell, company after company--that we wish we'd never done.'' Still, he says, ''when I sit back and look at my results, I say the collective decisions I've made, from the time I started to date, appear to be sound. They have not been flawless...but they've created a lot of fortunes--not only for me.'' That's for sure. Since leaving his money-management post for the oil-rich Bass family in 1986 to concentrate on his own investments, Rainwater says he has racked up a net annualized compounded rate of return of 26%. This year marks only the second time in Rainwater's career that his net worth will fall. And of the six companies in which he holds large stakes, Magellan is the only one that has fallen below his purchase price. Nor was Rainwater exactly blindsided by recent market turmoil. In early 1997, he got so worried that he moved to shield the 40% of his net worth that wasn't tied up in his big six public companies. The flurry of activity included yanking $70 million out of hedge funds and hawking private holdings such as 50% of Dallas' posh Hotel Crescent Court and 11% in the Texas Rangers baseball team--the latter two moves bringing in $25 million each. VERY LIQUID. As a result, in an 18-month period culminating in mid-1998, Rainwater went from owing $100 million to being debt free and sitting on $300 million in cash, with a $250 million credit line to boot. ''I feel so stupid because I saw the train coming down the track,'' he says. ''I'm not used to having down years.'' But he is used to having money, even though he was born into modest circumstances. Rainwater's mother worked as a J.C. Penney Co. saleswoman. His father--of predominantly Lebanese origin with a touch of Cherokee Indian blood, hence the family name--joined a trading business founded by Rainwater's maternal grandfather, a Lebanese immigrant. Rainwater inherited his family's work ethic. ''Part of Richard's success,'' says Morton H. Meyerson, a Crescent director and Rainwater investment partner, ''is that he has this immigrant mentality of being very driven, working very hard, and really, really wanting to be successful.'' Rainwater likes to win--and it shows. He's a man who keeps score. Since cutting back on his work two years ago, Rainwater says he has exercised so religiously that his weight has fallen from 225 pounds to 185 pounds and his body fat from 27% to 19%. And he still brags about his drag-racing exploits back in high school. Riding a souped-up Buick, Rainwater says he set a record at a local raceway by going undefeated nearly 30 weeks in a row. Rainwater still competes as a hot-rod car owner and likes to take his dragsters out for practice spins, sometimes with Moore riding shotgun. Moving quickly has always been Rainwater's style. His big break in business came early. A math and physics major at the University of Texas at Austin, he headed off to Stanford University's Graduate School of Business with only $400 and a car to his name. But there he became fast friends with fellow Fort Worth native Sid R. Bass. And after a two-year stint as a Goldman, Sachs & Co. trader, Rainwater went to work for the Basses. Cutting deals for the family, Rainwater concentrated on picking up shares in blue chips like Texaco Inc. and Disney when they were cheap. As a result, the Bass empire grew from $50 million when he joined in 1970 to more than $5 billion when he left in 1986. ''Richard's style has always been to buy when no one else wants to buy and sell when everybody wants to get into it,'' says David Bonderman, who worked for Sid Bass's brother, Robert. ''The crux of Richard is that he is one of the best value investors of all time.'' HEALTHY PROFIT. Rainwater proved that again after leaving the Basses with his $100 million nest egg. Rainwater's first solo deal, ENSCO International, is now one of the world's largest oil-drilling firms. Today, Rainwater's 6% stake is valued at more than $100 million. The mother of all investment jackpots was Columbia/HCA. In the late 1980s, Rainwater surmised that the cost-cutting strategies that worked in other industries could be applied to health caRe. So, on Oct. 19, 1987, the day of the stock market crash,Rainwater launched Columbia Hospital Corp. with a rambunctious health-care buyout specialist named Richard L. Scott. Putting up $125,000 each, they formed a partnership to buy two hospitals. Inside of a decade, the operation was the world's largest hospital company. By the time Rainwater left Columbia's board to concentrate on Crescent Real Estate Equities, his investment had grown to some $300 million--a 2,400% return. In 1991, Rainwater made one of his most important deals, marrying feisty investment banker Moore. The couple shares an interest not only in business but in fitness and health foods (though when Moore returns to her native South Carolina she re-subscribes to the creed that ''the meaning of life can be found in fried gizzards''). Their Manhattan condo features a floor-to-ceiling oil painting of Moore dressed as a Southern belle. And they are a playful couple, finishing each other's sentences and even debating in front of a visitor about whether Rainwater should give away his money before or after he dies. Moore says he should do it sooner rather than later so he can see the results. Moore, 43, came into the marriage having made a bundle for herself by salvaging bankrupt companies for Chemical Bank in the late '80s. But now she does things the Rainwater way. ''I'm learning at the foot of the master,'' says Moore. When Rainwater stepped down from the Columbia/HCA board in 1994, Moore replaced him. Two years later, she left to become a director at Atlanta-based Magellan, where she and Rainwater had just bought a 12% stake. And since 1994, she has managed Rainwater's portfolio as president of Rainwater Inc. BAD COP. Moore's emergence freed up Rainwater to look at the big picture. ''I'd been working for over 25 years, and I'd made a great deal of money,'' offers Rainwater. ''After you're successful and wealthy, buying another car or a house just doesn't do it for you, and you're left thinking, 'What now?' I thought I could keep making money or I could do something else with my life and let Darla begin learning how to play for me the role I once played for Sid Bass.'' Moore jumped in with both feet, playing bad cop to Rainwater's good cop. It was Moore who helped Rainwater dismiss Pickens as CEO of Mesa. And after the Columbia investigation became public, she played a key role in helping Columbia's board oust Richard Scott--over Rainwater's objections. To this day, Rainwater says Columbia's board should never have fired Scott. ''I asked everyone the same thing: 'Why are you doing this?''' Rainwater says. ''And the only reason I got was because they didn't think he was the right person to deal with the government. That's not a reason to terminate him. If that's the case, I said, let's go hire someone to deal with the government.'' Such loyalty is quintessential Rainwater, say friends and associates. ''Once he's behind people, he tends to stick with them for a long time--sometimes too long,'' Moore says in her wicked Southern drawl. ''Richard is really conflict-adverse. I, on the other hand, thrive on controversy. I don't shrink from it. My knees don't go weak.'' NOT BORED. Moore, in fact, says she enjoys the current challenge of managing Rainwater's money. ''I pretty much sat for five years and watched the stocks go up every day, up every day, up every day. Ho hum, ho hum...Oh look, we've made another $20 million. Oh God, that was so boring.'' Now, Moore is having fun. ''I love the carnage,'' she says. ''There are dead bodies all over the street.'' From here on, Moore and Goff will handle Rainwater's new investments through a vehicle named Goff Moore Strategic Partners. ''I'm passing the dealmaking mantle on to Darla and John,'' Rainwater says. So far, Goff Moore has been moving slowly, buying oil and gas stocks, mortgage-backed securities, and high-yield bonds. ''Things are still brutal,'' says Moore. Rainwater found that out in the oil market. He maintains that rising global demand will push oil prices up to somewhere between $20 and $40 a barrel in two to five years. With crude hovering at $13, Rainwater reckons OPEC has miscalculated by failing to adjust to weak Asian demand. But he says that's a temporary development and he has sunk 20% of his fortune into the sector. ''It takes an enormous amount of self-confidence to stick to your guns when everybody around you is saying it'll never work. But that has been the key for Richard,'' says Moore. ''Nobody can talk him into or out of something once he has made a decision.'' Rainwater's Pioneer crew, led by CEO Scott D. Sheffield, is hunkering down. Having lost $103.6 million so far this year, it laid off 350 employees and sold $410 million worth of oil and gas fields in Texas and Oklahoma. And sources say more restructuring is coming. ''Rainwater and Sheffield are making the right moves,'' says Leigh Goehring, vice-president at Prudential Investments, which boosted its Pioneer stake in October. Crescent Real Estate Equities has its own set of troubles. Operating somewhat like a venture-capital fund, Crescent snapped up $3.8 billion in assets between 1994 and 1997--everything from office buildings to cold-storage units and hotels--at deep discounts. Over the same period, its funds from operations--the best measure of REIT performance--soared nearly 370%. Its share price followed, rising 215%. Crescent succeeded by buying mostly top-notch office buildings at fire-sale prices. Banking on an oil recovery, Rainwater picked up the bulk of these in the energy belt, particularly Dallas and Houston. Despite the fall in oil, Rainwater was right that local economic conditions would improve, and he was able to raise rents as a result. The problem was that as conditions stabilized, it became harder to find cheap properties--and Crescent began making riskier bets. In January, 1998, for example, the company said it planned to enter the Las Vegas gambling biz by buying Station Casinos Inc. for $635 million. Rainwater opted to roll the dice after a 1997 Labor Day weekend spent in Vegas at a rock and roll revival. Buying Station, he says, was a safer way to play the gaMe because it caters to locals rather than tourists. But investors thought Crescent overpaid. After its shares tanked, Crescent called off the deal in August. REALTY RETREAT. Canceling deals, in fact, has become something of a pattern in the Rainwater empire lately. Only days after the Station debacle, a complex deal involving 90 psychiatric hospitals controlled by Rainwater entities came unglued. Crescent had boughT the hospitals last year from Magellan. But REITs aren't supposed to own businesses with substantial nonrent revenues. So Gerald Haddock, a lawyer and close associate of Rainwater's, came up with a loophole whereby hospital operations were put in the hands of Charter Behavioral Health Systems (CBHS), a joint venture between Magellan and Crescent Operating. Under the plan, Crescent Operating was supposed to sell shares so it could buy out Magellan's 50% stake. But with the psychiatric hospitals struggling, Crescent Operating called off the agreement. ''CBHS has been a huge disappointment,'' says Joe Harvey, director of research at investment fund Cohen & Steers Management Inc., a large shareholder in both of the Crescent companies. ''The bottom line is, the Crescent guys missed it on this one.'' On the property side, Haddock says Crescent is ''still at the table,'' trying to close a deal with Reckson Associates Realty Corp. of Melville, N.Y., to buy Tower Realty Trust, a New York REIT. However, in July, Crescent called off a $240 million San Diego office deal. And in September, it backed out of a $450 million purchase from Prudential Insurance Co. ''Crescent is reacting to changes in market prices and getting out of deals that no longer make sense to them,'' says analyst John Lutzius at Green Street Advisors Inc., a real estate investment firm. But that doesn't cut it with everyone. ''You don't bust deals because market prices change,'' says Frederick S. Carr Jr., principal at The Penobscot Group Inc., a realty investment research company. ''They could become known as a company that doesn't close deals, and that will hurt them.'' But Rainwater says his concern these days is donating money rather than making it. In fact, he plans on giving away his fortune--after providing for his family and setting aside a $120 million trust for Stanford and the University of South Carolina, Moore's alma mater. Rainwater's philanthropy is modeled on his business strategy. Spot a good program early, help get it started, then move on. These days, he's funding some 100 programs, including the Fort Worth Save Our Children Learning Center. ''Doing this, I could live the rest of my life getting up in the morning and saying, 'Boy, I've really got something worthwhile to do today,''' he says. ''I don't necessarily feel that way about doing another business deal.'' Maybe. Rainwater, after all, still keeps score. Sitting on the floor of his condo with Doodle and Darla, he asks his wife: ''If I were enthusiastic and got up early and went to all those meetings and really pushed it hard, you think in the next 12 years I could add another zero to my net worth?'' Moore says he could. Rainwater smiles and nods affirmatively. ''So, 12 years from now, I could have something like $15 billion, huh?'' Rainwater is thinking it over.
By Stephanie Anderson Forest in New York, with Kathleen Morris in Los Angeles, Amy Barrett in Philadelphia, and Susann Rutledge and Barbara Silverbush in New York RELATED ITEMS
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Updated Nov. 19, 1998 by bwwebmaster
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