Hewitt EnnisKnupp still suffers merger pains

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Building: Stephen Cummings predicts continued revenue growth for the firm in 2012.

Staff turnover and client defections have accompanied Ennis Knupp & Associates' transition from private partnership to financial group affiliate during the past 18 months.

On April 3, the $50 billion Massachusetts Pension Reserves Investment Management board could become the latest client to move on when it takes up an investment committee recommendation that Callan Associates replace the firm's latest incarnation, Hewitt EnnisKnupp Inc. PRIM hired Ennis Knupp in early 2009.

In a telephone interview, Stan Mavromates, chief investment officer of Boston-based PRIM, cited “organizational changes” at Ennis Knupp — its acquisition by Hewitt Associates and subsequent employee turnover — as “factors behind our decision.”

By contrast, Callan executives' insistence that, after considering a merger with Mercer a few years ago, the firm is determined to remain private “was attractive to us,” he added.

The departures of legacy Ennis Knupp professionals and clients haven't derailed Hewitt EnnisKnupp, the behemoth with more than $2 trillion in assets under advisement created on Sept. 2, 2010, when Ennis Knupp's partners sold the company to Hewitt Associates Inc., just as Hewitt was being acquired by Aon Corp.

In a telephone interview, Stephen Cummings, the Ennis Knupp CEO who became CEO of Hewitt EnnisKnupp, said even in 2011's “proverbial year of transition,” Hewitt EnnisKnupp was able to grow revenue at the low end of the steady annual 15% to 23% range Ennis Knupp had enjoyed in the decade leading up to its sale.

With businesses such as the discretionary consulting/outsourced CIO operations that Aon and Hewitt brought to the table showing strong gains, the firm's revenue growth this year is likely to come in closer to 23% than 15%, he predicted.

Mr. Cummings said the Ennis Knupp culture of focusing exclusively on clients has remained intact following the acquisition. Even so, for a number of legacy Ennis Knupp professionals and clients, the past 18 months have been marked by a dramatic shift for a firm that long touted its independence as a key to its client-focused culture.

That shift was captured in successive bids for MassPRIM's investment consulting contract. In its first, successful proposal submitted in early 2009, Ennis Knupp noted that 30 senior professionals owned the firm — a structure “crucial to attracting and retaining the best people possible.” Three years later, as the contract was being put out again for bid, Hewitt EnnisKnupp said having a financially strong parent “allows us to attract and retain top-caliber talent and pursue new initiatives.”

One Ennis Knupp veteran who left after the merger, and declined to be named, said a successful investment consulting firm can be built on either structure, but “changing the rules in the middle of the game” is disruptive.

Major factor

Industry veterans familiar with Ennis Knupp said losing that partnership culture has been a major factor behind what they term a high level of departures over the past two years. Some note that more than 40 of Chicago-based Ennis Knupp's 130 professionals at the time of the Hewitt deal have since moved on. (A roster of departures is at www.pionline.com/EnnisKnuppList.)

Mr. Cummings said he figures that a little more than 30 legacy Ennis Knupp employees have moved on.

Some left because Hewitt EnnisKnupp, a firm with a global footprint and a range of businesses, was no longer the privately owned company “doing one thing very, very well” that they had joined, he said. Others — in back-office areas such as information technology or human resources — saw positions eliminated as Hewitt, Aon and Ennis Knupp were combined; and still others were let go, he said. He said the level of turnover wasn't surprising.

Mr. Cummings said the decision of Ennis Knupp's 23 full partners — with stakes of roughly 4% each in the company and equal voting rights — to sell to Hewitt (and by extension, Aon) brought a number of pluses to weigh against the minus of ceding the company's independence, including instant global reach and the ability to compete immediately in fast-growing business segments such as delegated consulting.

Delegated consulting — which now accounts for a little more than 50 U.S. clients and $15 billion in assets at Hewitt EnnisKnupp, roughly double the size at the time of the merger — has been behind some of the firm's more than 50 consultant and analyst hires during the past 18 months, Mr. Cummings said.

Among them are David Kelly, a principal and senior consultant from Mercer's investment consulting business who was hired in March as a partner in Hewitt EnnisKnupp's delegated solutions group; Edwin Koopmans, director-treasury with Sara Lee Corp., who joined in September as a partner and head of client service for the firm's delegated investment solutions practice; and Robert Wilen, a principal at Pensions First, who likewise joined Hewitt EnnisKnupp in September as a partner, focused on pension risk management services and discretionary consulting.

Full partners stay

While a number of Ennis Knupp associates, who had closer to a 0.4% stake in the company, have moved on, the firm's full partners have remained, Mr. Cummings said. He predicted that turnover related to legacy Ennis Knupp employees deciding the new environment doesn't appeal to them is largely over.

One executive recruiter, who declined to be named, said it might be too soon to reach a definitive conclusion on that score, as payouts by Hewitt for those partners' stakes are being spread out over four years.

Mr. Cummings, while declining to reveal what a 4% Ennis Knupp stake would be worth, said he doesn't believe the scale of “deferred distributions” yet to come would be “enough to cause somebody who was unhappy to stick around.”

In a lawsuit filed on Oct. 4, 2010, in U.S. District Court for the Northern District of Illinois in Chicago, Neeraj Baxi, a former Ennis Knupp partner who ran the firm's Mumbai office until he was terminated in February 2010, argued that the value of his 4% stake in the company would have surged from roughly $120,000 to $1.5 million following Ennis Knupp's sale to Hewitt. The case is ongoing.

If the outlook for legacy Ennis Knupp professionals isn't entirely clear, the picture has been similarly mixed when it comes to legacy Ennis Knupp clients. A number of big public fund clients of Ennis Knupp — including the $110 billion Austin-based Teacher Retirement System of Texas; the $150 billion Florida State Board of Administration, Tallahassee; and the $15 billion Nebraska Investment Council, Lincoln — have all signed up with Hewitt EnnisKnupp.

Others, including the $83 billion State of Wisconsin Investment Board, Madison; the $11 billion Maine Public Employees Retirement System, Augusta; and $18 billion United Technologies Corp., Hartford, Conn., have moved on.

For some pension executives, Ennis Knupp's transition from independent firm to cog in a bigger corporate wheel has diluted the investment consultant's appeal. An executive with one pension plan that retained Ennis Knupp until the merger, who declined to be named, said the argument that a privately owned, independent Ennis Knupp could deliver “unbiased recommendations” played well in his board's discussions and votes. In the latest contract go-rounds, the absence of that “selling point” contributed to the board's decision to try another firm, he said.