Team Moves For Investment Management Firms

Team Moves For Investment Management Firms Using Lift Outs for Rapid, Strategic Product Growth A SHEFFIELD HAWORTH WHITE PAPER

Introduction As investment management firms strive to differentiate themselves, filling key investment product gaps or strengthening underperforming investment capability remains the major driver of strategic growth initiatives. With the war for talent raging, firms face big challenges when it comes to attracting, retaining, and managing the human capital that is pivotal in bringing new product capability to market. THIS DOCUMENT CONTAINS PROPRIETARY DATA FROM SHEFFIELD HAWORTH Sheffield Haworth provides people-driven executive search and talent advisory services to financial services institutions throughout the world. This white paper has been prepared using internal, proprietary data based on dozens of placements and team moves executed by Sheffield Haworth and consultants in its Asset Management practice. If you would like further information on the data-points contained within this white paper, or are seeking to cite them in works of your own, please contact Andrew Blane at +1 212 593 7119 or blane@sheffieldhaworth for assistance. 2

Traditional Methods For Powering Growth Traditionally, two methods of growth have governed the majority of strategic initiatives focused on the development and management of new and existing investment products: 1) internal promotion; and 2) acquisition of external talent both through purchasing entire firms as well as key individual hires. Internal promotion ensures a high degree of control over a firm s culture and provides a conduit for career progression and talent retention throughout an organization. Internal promotion also allows a great deal of flexibility in creating products that compliment a firm s philosophy from an investment standpoint while addressing gaps in the overall product array, thereby better servicing existing and potential clients. Acquisition as a growth driver has long been favored as way of gaining a deeper bench within a specific investment strategy, infrastructure, client base, and in many cases, geographic penetration. In addition to a heavy initial cost burden, acquisitions frequently include many non-core elements that go beyond the key targets of the deal. In many cases, these non-core investment capabilities must be eliminated, leading inherently to what can be a significant reduction in return on investment calculations. Further, given the challenges of effectively merging two distinct cultures, retaining key talent becomes a challenge when financial incentives expire. This is a major contributor to the failure of such hires in the long term. Given the challenges of effectively merging two distinct cultures, retaining key talent becomes significantly amplified when financial incentives expire. However, internal promotion comes with a protracted timeline. When it comes to the institutional client and consultant perspective, a minimum of three to five years is required to prove the methodology, cohesion of the team, and achieve acceptance to a degree where the new product can begin gathering assets in an effective manner. As a result, such an extended timeline coincides with a high degree of risk that the desired performance is achieved and the assembled team gels well together over the years. This is a great option for firms with a longer growth horizon and an appetite for an incubation period that could be three-to-five years out. 3

Team Moves: A Hybrid Approach There is a third option that combines the best elements of both acquisitions and internal promotion into a hybrid approach: a Lift Out, also known as a Team Move. While team moves have been around for some time, they have gained popularity in the years since the global financial crisis for a number of reasons. LEAD WITH CULTURAL FIT When done correctly, matching a firm s existing culture to that of an incoming, intact investment team yields a long-term relationship. Most team moves represent the final career step for the investment team and can translate to a 10- to 20-year franchise within the new home for any given product. Some of the very first lift-outs executed in the early 1990s, such as the International Value Equity franchise at The Boston Company for example, have more than 20 years of success. For firms embarking on a growth phase, one of the biggest challenges is to emerge from that growth still looking and feeling like the culture established in the beginning. By focusing on culture as the key driver of success, a wellmatched incoming group acts as a steward of the firm s core beliefs rather than a catalyst for change. It is critical to place a high value on how the incoming group meshes with existing personnel from an inter-personal relationship standpoint. Firms that are successful in evaluating culture take a thoughtful, unhurried process of getting to know one another as people, first and foremost, rather than chasing the hot product or asset flow. Patience and allowing relationships to develop over time is key to long-term success with regard to cultural fit. By focusing on culture as the key driver of success, a well-matched incoming group acts as a steward of the firm s core beliefs rather than a catalyst for change. IMMEDIATELY SALEABLE TRACK RECORD A driving motivation for bringing an intact team aboard is the ability for the team to bring their long-term, excellent investment track record. There are a variety of methods to achieve this portability, each with a certain level of complexity. When managed appropriately, the team s new firm can market and sell their investment record immediately. This results in swift market penetration that other growth methods, such as internal promotion, could never achieve. It also gives the firm s distribution and marketing infrastructure a deep coverage capability, particularly when dealing with best-in-class investment products. 4

ACCRETIVE DEALS With firms keeping a sharp eye on the bottom line, the opportunity to fill a key investment product gap with a top-performing team via a lift out that covers the costs of acquiring the team is particularly attractive. Many key teams that move often bring with them some of their existing, long-term institutional clients. When a team departs a firm, and there is no longer a capacity at that firm to continue to manage a client s assets in a similar strategy, institutional clients are faced with a choice: Go out to bid for a new firm and relationship or follow their old relationship to a new home. Of the last 12 significant team moves Sheffield Haworth has helped facilitate, $42.28B in AUM was put into play with $21.25B, or 50.3% of the total asset base, ultimately trailing the teams that moved within a 12-month period. The result: An investment break-even for a team move within a six- to 12-month timeframe. ONE SIZE FITS ALL Given the capital required, traditional acquisitions are typically limited to the larger investment management firms. Team moves, however, given that they are deals that can quickly pay for themselves, are effective tools for investment management firms of all sizes, from the sub-$10b in AUM manager to a Top 10 firm by global AUM. Focusing team move efforts on a successful match of human capital breeds greater success for the overall strategic growth of a firm that brings a new team aboard. Demographically, a team that moves is generally three to seven people who have been together for 10+ years and have individually more than 20 years of investment management experience each. As long as the firm bringing the team aboard has a strong commitment to seeing the team flourish and achieve success, the move should be fruitful for all parties. That s a significant improvement over the normal three-or-more years commonly accepted for an acquisition to break-even from an initial cost perspective. Case Study 1 A U.S.-headquartered investment management firm with under $10B in AUM wanted to expand its investment product array beyond its then-current offering of U.S.-equity strategies. In order to drive as much shortterm value as possible, the group chose a team-move strategy to expand into the area of Global and Emerging Market Equity. This required the firm to establish a new office outside the U.S. a first step for this particular organization and a leverage point to form an international affiliate. In the ensuing three-and-a-half years since the addition of this group, the team has flourished, having integrated well given the attention paid to cultural fit, and raised over $4B in AUM across the new strategies. Meanwhile, overall AUM has doubled to over $20B. Case Study 2 A publicly held U.S.-based asset management firm wanted to expand its boutique affiliate offerings with a top-performing multi-sector Fixed Income team. The team that moved was set up as an independently branded boutique, but wholly owned by the parent. This allowed the team to leverage centralized distribution, marketing, and related infrastructure while maintaining autonomy with its investment process. The team consisted of 11 investment professionals with one lead, high-profile Portfolio Manager. AUM for the group was $5.6B with revenues of approximately $25M. The team move took six months, start to finish, to complete. Within 60 days following the lift-out, the entirety of the team s prior $5.6B in AUM followed it to its new firm. Since joining, the team has roughly doubled AUM and now manages just over $11B. The parent company s stock price has gone up 5X. 5

Conclusion: The Best Of Both Worlds A team move can be thought of as a surgical approach to growth. A firm is able to acquire precisely the investment strategy it seeks, managed by people who share a common philosophy. It is important that a firm considering a team move recognize that there is a certain amount of faith required to execute such a deal and that finding the right cultural fit can take up to 12 months. Firms must have the patience and fortitude to hold out for the perfect option. For firms that are risk-averse or simply in too much of a rush, a team move may not be the best option. Team moves incorporate the value of a cohesive, loyal group similar to one created by an internal promotion scenario with the positive bottom-line impact that acquiring an intact business can bring. A team move is the best of both worlds and, when carried out with an emphasis on cultural fit, the results can be transformative. About Sheffield Haworth Sheffield Haworth is a leading global executive search and talent advisory firm. Leveraging its deep industry knowledge, the firm partners with clients all over the world to provide tailored solutions for their business and talent needs at the senior management level. Established in 1993, Sheffield Haworth has 12 offices throughout the Americas, Europe, Middle East and Asia Pacific and serves clients in the Financial Services, Business & Professional Services and Technology industries. Sheffield Haworth s global Asset Management executive search practice specializes in helping Asset Managers firms identify, attract and retain the best talent to help diversify, grow and strengthen their propositions. CONTACT UK +44 20 7236 2400 - europe@ US +1 (212) 593-7119 - america@ Asia +852 2110 1234 - asia@ 6