New focus

Mercer sees Hammond deal as way to open endowment doors

Fresh from its decision to walk away from the U.S. public pension market, Mercer LLC's investment consulting arm is moving to jump-start a push into the endowment and foundation market with the acquisition of Hammond Associates.

In a Nov. 24 telephone interview — the day Chicago-based Mercer Investment Consulting Inc. announced it would buy St. Louis-based Hammond by year end — Jeffery J. Schutes, Mercer's U.S. investment consulting leader, predicted the combination of Hammond's expertise in serving sophisticated endowment and foundation plans and Mercer's global network and resources would prove powerful.

Terms of the deal were not disclosed.

While Mercer has succeeded in bolstering its alternatives-related research capabilities in recent years, adding Hammond's long experience in market segments such as hedge funds and private equity will “rocket-launch us” in those cutting-edge capabilities, Mr. Schutes said.

In a separate interview, Hammond CEO Dennis R. Hammond, who founded the firm in 1985, said the deal will help provide his team with the “breadth and depth ... critical to having a growing practice” in today's competitive environment.

Corporate pension funds account for the bulk of the $3.7 trillion in global assets under advisement, Mercer reported for Pensions & Investments' latest survey on the investment consulting industry. (See rankings of the leading consultants.)

Hammond, meanwhile had about $47 billion in assets under advisement as of Sept. 30, company officials said. As of June 30, endowments and foundations accounted for 74 and 70, respectively, of the firm's more than 200 clients.

In a news release, M. Michele Burns, Mercer's chairwoman and CEO, cited the planned acquisition as “tangible evidence of Mercer's commitment to our investment business and our determination to increase our U.S. market share.”

The latest move follows a few setbacks in that regard. An ambitious bid by Mercer in early 2009 to create an investment consulting giant in the relatively fragmented U.S. market by acquiring San Francisco-based Callan Associates Inc. fell through at the last minute.

More recently, the firm decided in October to stop serving U.S. public pension plans, reflecting concerns, according to market sources, that those deeply underfunded plans could be tempted to join hands with contingency law firms in targeting Mercer's deep-pocketed parent, Marsh & McLennan Cos. (P&I, Oct. 18). U.S. public pension clients accounted for roughly $240 billion of the $3.7 trillion in global assets under advisement Mercer reported as of June 30.

$37 billion addition

The Hammond deal will bring roughly $37 billion in client assets under advisement to Mercer, assuming Hammond has to give up its public fund clients.

Still, the endowment and foundationmarket segment — traditionally the most aggressive in alternative investments — has been one of the fastest growing for investment consultants. Mercer's news release, citing a report by Greenwich Associates, said between 2005 and 2009, “endowment and foundation funds using investment consulting services grew at a compound rate of 10% annual,” twice the rate of U.S. corporate and public retirement funds.

Mercer's planting of its flag in that segment could spell increased competition for Boston-based Cambridge Associates LLC, the undisputed leader in investment consulting to endowments. According to Cambridge's website, its clients account for more than 70% of total U.S. higher education endowment assets and roughly 40% of U.S. foundation assets.

In the interview, Mr. Schutes predicted that with Hammond, Mercer will quickly become “a very formidable competitor” to Cambridge.

Hammond’s clients include the $1.1 billion endowment of Baylor University, Waco, Texas and the $668 million endowment for the Rochester (N.Y.) Institute of Technology.

Observers have predicted that a number of consulting industry veterans who founded firms in the 1980s will be looking to cash out. But Mr. Hammond — who owns more than 75% of the stock in Hammond Associates — said cashing out wasn't the motivation behind his firm's deal with Mercer.

“As a small boutique, it's difficult to have the financial resources to compete in a global market,” said Mr. Hammond. “That's why we're so excited” about the deal: “We'll remain a boutique shop to our clients, but we're going to be able to access the global breadth of their research,” he said.

Asked if absorbing Hammond would leave Mercer on the sidelines for the moment when it comes to industry consolidation, Mr. Schutes said it would not. “We believe there'll be (further) consolidation in the market, and Mercer will continue to look at opportunities.”