Todd Boehly (left) and Mark Walter at Guggenheim's New York offices
Photo: Jonathan Becker
By Scott Cendrowski and James Bandler
February 27, 2013

When the bidding began last winter for the Los Angeles Dodgers — a storied baseball team in America’s capital of glamour — the lengthy list of suitors was predictably studded with bold-faced names. There were TV celebrities like Larry King, baseball luminaries like the former Dodgers great Steve Garvey, billionaire investors such as hedge fund mogul Steve Cohen, and prominent owners of other teams, such as Stan Kroenke of the NFL’s St. Louis Rams.

Fittingly enough, the winner was a charismatic superstar with local pedigree: retired Los Angeles Lakers legend Magic Johnson. Or rather, the victors were, as the headlines typically put it, “a team led by Magic Johnson.” Sports fans across the country gasped at the audacious size of the triumphant bid: $2.15 billion. That sum obliterated the next highest reported offer, from Cohen, by a staggering $850 million. The difference between the two bids was larger than the previous record for a baseball club: $845 million for the Chicago Cubs in 2009.

The team “behind” Magic Johnson — Guggenheim Partners — turned out to be the main force in the deal, and the eye-popping Dodgers acquisition has been only one of a handful drawing ever more attention to the firm. The New York- and Chicago-based operation has been turning up everywhere in Los Angeles. In September, a Guggenheim group spent a reported $370 million for Dick Clark Productions, the company that produces the Golden Globes telecast and So You Think You Can Dance. A few years before, Guggenheim teamed up with other investors to buy seven trade publications, including the Hollywood Reporter.

Lately, Guggenheim has turned its sights on another crown jewel: AEG, which billionaire Philip Anschutz has put on sale for $10 billion. AEG owns the L.A. Live entertainment development, hockey’s L.A. Kings, and a global concert promotion division. It also owns the Staples Center, where the Lakers play, and developed the site that is expected to attract an NFL team to L.A. Guggenheim is considered the favorite for AEG, though there are hints, as we’ll see, that it may bow out of the bidding.

The secret is out: Guggenheim is a powerhouse on the prowl. What not that long ago was a small office overseeing a venerable family fortune has burgeoned into something much different and much bigger. Guggenheim now manages $170 billion for institutions, individuals, and insurance companies. It runs several hedge funds and an investment bank. Another part — the one that makes headlines — is akin to a private equity firm. It gathers investors on a deal-by-deal basis (rather than raising war chests that it can deploy over a period of years) to fund giant purchases such as the Dodgers.

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Guggenheim is an anomaly if ever there was one. It’s a firm whose name is instantly recognizable to anybody who has ever heard of the Guggenheim Museum and its swirling New York City building, designed by Frank Lloyd Wright. It has hired a coterie of business luminaries, such as former Bear Stearns CEO Alan Schwartz and Cendant founder Henry Silverman, who are familiar figures to readers of the financial press. But it has preferred to operate out of the spotlight and what it does is a mystery to most people.

Its secretiveness is partly strategic and partly a reflection of the reserved, stolid personality of Guggenheim’s CEO, Mark Walter. He has focused on managing the rapidly expanding firm, while its more frenetic president, Todd Boehly, has been driving the glitzy new deals. “They want to be the dark horse in the shadows,” says a former employee.

But Guggenheim also knows it’s growing too large to escape scrutiny. It’s one thing to manage portfolios for discreet, wealthy clients. It’s quite another to scoop up high-profile businesses with intense fans and media coverage.

And one prominent client — former junk bond king Michael Milken — is bringing the firm unwanted attention. Fortune has learned that the Securities and Exchange Commission is investigating his dealings with the firm and whether they violate Milken’s ban from the securities industry.

As it attracts more notice, Guggenheim is finally openings its doors — just a crack — meeting in February for an exclusive interview with Fortune. Among the crucial questions: Is Guggenheim the latest hot investment outfit looking to flip companies? Or is it shaping up to be something more, a conglomerate with dozens of profitable long-term businesses that aspires to be a sort of Hollywood equivalent of Berkshire Hathaway (BRKA)? “This is not a company whose plan is to sell everything next week or next year,” says Walter, a model of politeness who nonetheless dribbles out information as if he were a parched desert traveler tightly clutching a canteen with its last few drops of water. Observes one consultant: “Everyone is scratching their head a little bit asking, What are they trying to do?”

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The Guggenheim family fortune dates back to 1881, when Meyer Guggenheim paid $5,000 for a stake in two Colorado lead and silver mines. Within a few decades his seven sons had amassed huge riches, with operations from the Yukon to Bolivia. They became one of the most prominent German Jewish families in New York, according to the history Our Crowd, well before Meyer’s son Solomon gave the Guggenheims a measure of immortality by founding the museum that bears their name on Manhattan’s Fifth Avenue.

Like other ultrarich families, the Guggenheims managed their assets through a family office. That operation chugged along until the late 1990s, when a friend named J. Todd Morley proposed transforming the family firm into something bigger and more ambitious. Morley headed a fixed-income trading company and had gotten to know Mark Walter, who ran a multibillion-dollar business called Liberty Hampshire that structured asset-backed securities. Morley advocated combining all three operations.

The new Guggenheim Partners would invest in various forms of structured debt, which were then taking off, and they’d use the name to attract more investors. “We had the idea that a powerful brand would launch our marketing,” Morley recalls. The family accepted.

The new entity opened in 1999 with $5 billion under management. Two years later Walter hired Boehly, a former Credit Suisse First Boston banker who brought with him a successful leveraged-finance team that traded loans and junk bonds.

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One of Guggenheim’s earliest clients was Sammons Enterprises, a Dallas conglomerate that controls several insurers. Today Sammons owns 35% of Guggenheim, whose employees own just under 50%, including stakes of under 10% each for Walter and Boehly. The Guggenheim family retains a small percentage.

Other clients included a passel of small and midsize insurers without the resources to invest their own assets. They benefited as Guggenheim’s bond strategies thrived. For example, the core fixed-income accounts run by CIO Scott Minerd — a former competitive bodybuilder in the superheavyweight division — returned 7.3% annually from 1999 through 2012.

That stellar performance attracted a flood of assets, especially from insurers. If you tally up the money Guggenheim manages for insurers (including some the firm has now bought), it totals $75 billion today.

Guggenheim’s rapid growth in assets under management — from $5 billion to $170 billion in 14 years — is a tribute to the steady hand of CEO Walter. Trim and silver-haired, Walter, 52, is the picture of Midwestern diffidence, the sort of dependable guy you’d imagine running your local bank if Frank Capra were making movies today. Walter, who grew up in rural Iowa with parents who never made it to college, avoids the spotlight so assiduously that he confesses that his conversation with Fortune is only his third formal interview ever. He is circumspect and thoughtful.

By contrast, Boehly, a Maryland state wrestling champion in high school, is a whirl of energy. With disheveled hair — he has a few unruly forelocks he can’t tame even at the best of times — and wrinkled shirts, at 39 he still resembles a boy forced to wear proper adult clothing. “He doesn’t look like an executive,” says a former colleague. But Boehly’s appearance belies his role. He is Guggenheim’s chief dealmaker.

Friends say he’s a workaholic. Boehly leaves the impression of a supercaffeinated man juggling dozens of projects, interrupting himself midsentence to interject an observation about another deal. He would call friends from Greece at 6:30 a.m. during the European debt crisis to talk about opportunities, oblivious to the fact that it was 11:30 p.m. in New York. “It’s nice to have a partner who is working constantly,” says Walter with typical understatement.

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For all their difference in temperament, Boehly and Walter share one ambition. “These guys want to be billionaires,” says a former colleague. And while their roles complement each other — Walter is the wise older sibling and Boehly the manic idea man — it is Boehly who is propelling the firm into new terrain. “I don’t think Mark was looking to set the world on fire,” says someone close to Guggenheim. “I think Todd has helped kind of ignite that.”

Boehly is also the person who brought Guggenheim its most intriguing client. Nearly a decade ago he met Michael Milken through a friend. “Milken is an idol of sorts to Boehly,” says a former colleague. (“When I was young, I read lots of books on people,” says Boehly. “Mike is no more of an idol than Steve Jobs, Ben Franklin, or Mark Twain.”) In past years Milken would sometimes speak to Boehly several times a week about markets, companies, and philanpthropy. Boehly is active in Milken’s prostate cancer foundation.

The relationship has been lucrative for both men. Milken was an early investor in Boehly’s hedge fund. At one point Milken had nearly $800 million invested in various Guggenheim funds and deals. (Milken’s worth is $2.3 billion, according to Forbes.) In one instance, Milken and Guggenheim jointly invested in an energy company called Milagro, which says the infusion helped it buy the Gulf Coast operations of Petrohawk Energy for $825 million in 2007.

Milken’s settlement with the SEC for his role in the 1980s Wall Street scandals allows him to manage his own money. But he is banned from acting as an investment adviser or broker. Milken violated the ban in the ’90s, according to the SEC, when he advised Ron Perelman and Rupert Murdoch on deals. In 1998 Milken settled the SEC’s claim for $47 million without admitting or denying wrongdoing.

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Fortune has learned the SEC is investigating Milken’s relationship with Guggenheim, specifically the question of whether he is violating his ban by effectively acting as a manager of Guggenheim investments beyond his own. The question is: Does Milken provide advice in exchange for some form of compensation? The SEC is looking at a number of transactions that Milken has done with Guggenheim, including the Milagro deal.

Boehly has been subpoenaed by the SEC, and the firm has provided thousands of trading records and e-mails to investigators. The agency has contacted Guggenheim clients about Milken. SEC investigators are in regular communication with Guggenheim, but so far the probe — which has continued for two years — hasn’t resulted in any formal action.

Walter says, “Mike doesn’t have an ownership or managerial role in the firm in any way, shape, or form.” A spokesperson for Milken provided a statement noting that with regard to the advice he gave that led to his 1998 settlement with the SEC, Milken had been advised by his attorney that he was permitted to engage in those specific consulting transactions. Today, the statement continued, “he does spend time on his and his family’s personal investments, including working with many investment advisors and money managers. He discusses investments with these advisors from time to time, but only as an investor of his own funds and those of his family.” An SEC spokesperson declined to comment.

Guggenheim had enjoyed huge success managing assets for insurers. Eventually Walter and Boehly found themselves with a new opportunity: to buy some underpriced insurers. That also offered a bonus — they could gain even more investing capital. They’d be able to tap the “float,” the billions insurers hold in between receiving premiums and paying out claims. Warren Buffett has become fabulously rich doing this.

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Guggenheim had been cautious enough to avoid the cataclysm of the financial crisis. So when disaster struck and asset prices plummeted, it pounced. “When that opportunity came to us,” Boehly says, “we were just well positioned.”

In 2009, Guggenheim bought Wellmark Community Insurance. A year later it and other investors spent $400 million for control of Security Benefit, and $470 million to buy life insurer EquiTrust in 2011. Last year a Canadian insurer sold its U.S. annuities business to Guggenheim for $800 million. The firm also acquired two companies, Claymore and Rydex, that sell exchange-traded funds.

Guggenheim was building a base of capital to use for potential deals. It wouldn’t take long for Walter and Boehly to use it.

These days Boehly is most excited about the potential of live events. Sports, concerts, awards shows — these primetime happenings, he believes, will continue to draw huge viewership and ad revenue despite splintered TV audiences. “As the world becomes more and more fragmented, and content becomes more and more commoditized, that premium content is only going to be become more valuable,” says Boehly.

The Dodgers hit Boehly’s sweet spot: a live events business that Guggenheim could buy using its insurance assets and those of its clients. Boehly and Walter had been skeptical when former Braves president Stan Kasten first floated the idea of buying a baseball team.

But when news broke in 2011 that the Dodgers would go on the block, Guggenheim zeroed in on a crucial detail: The team’s TV deal was expiring after the 2013 season. Many people believed a new contract might bring in $3.5 billion over its lifetime. Boehly thought that figure was ludicrously low. Every other top L.A. team had locked up TV rights until 2031. Time Warner Cable and Fox Sports were likely to offer huge sums for the Dodgers rights.

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Guggenheim put together an ad hoc ownership group (a practice the firm adopted in its early years because it didn’t have much capital and then grew comfortable with the process). Walter, Boehly, and a Texas energy investor and client named Bobby Patton each contributed $100 million. Magic Johnson added $50 million, while movie producer Peter Guber kicked in $25 million. The remaining $1.2 billion came from insurance assets managed by Guggenheim.

That news sparked a firestorm in the press, which also mocked Guggenheim for overpaying. How could heavily regulated insurers invest in something as risky as a sports team? Never mind that insurance companies invest with, say, hedge funds all the time. The truth is elite sports teams are historically stable investments: They rarely lose their value and offer dependable cash flows from beer and ticket sales and media rights.

In January the firm enjoyed a moment of sweet vindication. The TV rights once expected to fetch $3.5 billion went for twice that amount. Time Warner Cable (TWC) is reportedly set to pay $7 billion over 25 years for a new Dodgers sports network, created by Guggenheim, called SportsNet L.A.

Despite that success, Guggenheim may pull out of the bidding for another huge deal — for the AEG sports and concert conglomerate, whose properties fit right into Boehly’s biggest investment theme. Guggenheim has been viewed as the leading suitor. But it has recently backed off, according to people close to the negotiations. The price tag of $8 billion to $10 billion may be too much for Guggenheim to stomach. The situation could change, but right now Guggenheim is no longer the front-runner.

Meanwhile, the firm is still on the hunt for deals. It wants to add insurance assets and bolster its live events business. In January it hired former Yahoo (YHOO) CEO Ross Levinsohn to lead a new operation that includes its magazines and TV production company. What Guggenheim will do with these businesses over the long-term is still up in the air. Whatever it does, it won’t be under the radar any longer.

This story is from the March 18, 2013 issue of Fortune.

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