A Profile of Buffett's Banker Byron Trott

Byron Trott has long been a trusted advisor to clients with names like Buffett, Walton, and Pritzker. Now the ultra-discreet financier is raising his profile by investing alongside them.

Byron Trott vividly recalls the day he became Warren Buffett (Trades, Portfolio)’s investment banker.

It was February 2002, and he’d recently received a call from Hank Paulson, then CEO of Goldman Sachs and Trott’s predecessor as head of the firm’s Chicago office. Tom Murphy Jr., son of the veteran media executive and longtime Buffett pal, was retiring from Goldman. Paulson had just left Buffett’s office in Omaha after informing him that Trott would now be, in banker parlance, “covering” him. “Go see him,” Paulson barked to Trott.

“Not a lot usually shakes me, but I was scared to death when I walked in,” says Trott, who prepared for the meeting by reading all of Berkshire Hathaway’s annual reports. The two hit it off, and the get-to-know-each-other session, scheduled for an hour, ran to three. Before it was over, Trott had a fee-generating assignment from Buffett, who is notoriously stingy about paying investment bankers. “I did what I do with most clients for the first time,” says Trott. “I say, ‘Give me your toughest problem. What have you not been able to accomplish?’”‰”

As it happened, Buffett had a pet project, a task that other bankers had failed to embrace. He wanted to create a security that paid Berkshire to borrow money, the opposite of how a loan typically works, with the catch being that investors also would get the right to buy Berkshire stock in the future at a lower premium than in a standard convertible debt offering. The concept was called a negative coupon convertible, and Trott cajoled a former Harvard finance professor working on the capital markets desk at Goldman to design it.

The sale of $400 million worth of the security—unglamorously labeled “Negative .75% SQUARZ”—proved a modest success for Goldman, but it didn’t exactly work out for Buffett. “The risk was that it’d convert,” says Trott, sharing the anecdote publicly for the first time. Buffett’s partner, Charlie Munger (Trades, Portfolio), hated the idea of diluting Berkshire’s equity by converting the notes into stock. The notes eventually did convert, as Munger had feared, and Goldman never sold them to another client. “I thought it would be entertaining to put out a deal that would have a negative coupon,” reflects Buffett. “In retrospect, it was not that smart.”

Smart or not, the arcane transaction transformed Trott’s career. By immediately rising to the challenge of his famous client, Trott earned Buffett’s trust, so much so that in 2004 Buffett mentioned Trott by name in his headline-making annual letter to shareholders. “He understands Berkshire far better than any investment banker with whom we have talked and—it hurts me to say this—earns his fee,” he wrote.

All of a sudden the low-profile Midwestern banker’s name became linked with Buffett’s—even as Trott himself largely remained in the background. Over the course of the ensuing decade Trott would work with the Omaha investor on multiple billion-dollar deals, including the $5 billion cash infusion into Goldman Sachs at the height of the financial crisis. Trott rose to become a Goldman vice chairman before leaving in 2009 to set up his own Chicago-based firm, BDT & Co.

Today that firm has carved out a lucrative niche by reimagining an old concept, the merchant bank—a financial outfit that advises powerful clients while investing alongside them. BDT works exclusively with what Trott calls “billionaires with businesses.” The merely rich aren’t of interest, and neither are institutionally owned, professionally managed corporations that are well served by bigger firms. Instead, the 56-year-old Trott, who is trim and a perpetual grinner, caters to the unique needs of families with names like Walton, Pritzker, and Wrigley by earning their trust the way he did Buffett’s. “Let us understand you, your company, your long-term objectives, and let us help you by being a true solutions-based adviser on your side of the table, not the kind of idea-of-the-day, dialing-for-dollars banker,” he says, summarizing his approach.

What sets Trott apart, along with his unique clientele, is his ability to sit on every side of the table. By stressing discretion, confidentiality, and patience, Trott and his colleagues repeatedly do what few other bankers can: They advise multiple parties to the same transaction—and then invest capital in some of the deals they’ve just brokered. In this fashion BDT has raised two funds, worth $8 billion, in five years and acquired stakes in companies that include Tory Burch, Peet’s Coffee, and the Pilot Flying J truck stop business. The capital comes largely from BDT’s own employees and the families in its network, who essentially are providing patient investment dollars to one another. Elsewhere on Wall Street such behavior would be called a conflict of interest. For the well-pedigreed club Trott has cultivated, it is considered a privilege of membership.

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