Firm performing well, but experts think AXA wanted more control
First, the French insurance giant on May 1 announced a massive leadership change-up, with little explanation, that included the departure of Peter S. Kraus as chairman and CEO of AllianceBernstein and eight independent directors.
“After eight years in the role, for Peter, we decided it was time to put new leadership in place at AB,” said AXA Chairman Denis Duverne in a conference call with analysts May 1 to discuss the changes.
Mr. Kraus was replaced as CEO of the New York money manager by Seth Bernstein, a former managing director and global head of managed solutions and strategy at J.P. Morgan Asset Management (JPM), who has no experience as CEO of a large financial firm. Former World Bank President Robert B. Zoellick was appointed chairman.
Then, on May 10, AXA announced it was planning an initial public offering of a minority stake in its U.S. insurance operations, AXA Equitable Life Insurance Co., which includes its 64% stake in AllianceBernstein.
“We have the unique opportunity together to create a leading U.S. life insurance, annuity and asset management company,” said Mark Pearson, president and CEO of AXA Financial, which is the U.S. arm of AXA, in a news release announcing the IPO plans.
Mr. Bernstein, in the same release, added: “At AB, we're excited to be taking this next step in our journey with AXA U.S. and the AXA Group. We'll continue to manage assets for both entities, and look forward to further aligning our businesses from here with new services and opportunities.”
AXA Investment Managers spokeswoman Woomi Yun said the IPO will not relate to AXA's money management unit.
“Events at AllianceBernstein in no way impact AXA Investment Managers, nor will AXA IM impact AllianceBernstein,” she said. “The organizations operate independently and AXA IM's focus on growing its Americas business across the U.S., Canada, Latin America and Mexico remains unchanged.”
AXA did not disclose when it plans to file.
Stunned the industry
The abrupt termination of Mr. Kraus and the eight independent directors stunned industry observers. After all, AllianceBernstein (AB) had been performing reasonably well — particularly for an active manager — and Mr. Kraus had helped reverse the trend of consistent outflows the company had experienced since 2007, leading to inflows in the second quarter of 2014.
Adding to the confusion, AllianceBernstein's owners seem happy with the firm's investment philosophy and a company spokesman said there is no intention of altering course.
Sources with whom Pensions & Investments spoke said they suspect the move is the result of AXA looking to have more control over its asset. AXA bought a minority stake in the manager 1991 and became the majority owner in 2000.
“All signs seem to point to AXA wanting to exert more influence and bring ( AllianceBernstein) more tightly into its orbit for whatever reason,” said Robert Lee, a managing director and analyst at Keefe, Bruyette & Woods Inc. in New York. “And to do that, I guess they felt that they needed to make sweeping changes. But it is perplexing.”
In its first-quarter earnings statement, released April 27, AllianceBernstein reported $497.9 billion in assets under management as of March 31, up 3.7% from Dec. 31 and up 5.5% from a year earlier.
Data from P&I show the firm's total U.S. institutional, tax-exempt AUM was $90.77 billion as of Dec. 31, up 2.1% from the year earlier period.
Mr. Duverne said in the May 1 call that he believes AllianceBernstein “has performed quite well over the years and the strength of the franchise is undeniable. But he also noted: “In light of the current challenges that the industry faces, we thought that it was appropriate to have a new leadership to lead the company forward and face the accelerated pace of challenge that the industry is facing now.”
Mr. Duverne did not provide details as to why AXA overhauled AllianceBernstein's leadership — and many industry experts found the reasoning for Mr. Kraus' termination wanting.
Domonkos L. Koltai, a partner and co-founder of investment bank PL Advisors, New York, called the change, “a surprisingly aggressive move.”
“By most objective standards, AB's performance has been decent on (Mr. Kraus') watch given where they started,” said Mr. Koltai. “He built a top-notch fixed-income business from scratch, for instance, and built some decent alternative capabilities.”
Dean Ungar, a senior analyst at Moody's Investors Service, said the removal of Mr. Kraus as CEO “is not a sign that the active management world is dead.”
“The company, an active manager, has been remarkably stable in an industry that's been facing challenges,” Mr. Ungar explained. “Revenue's up. Income's up. Operating margins are up. Sales are much higher than they were a year ago. In many ways, it was a very good quarter for AllianceBernstein.”
Following news of the planned IPO, Mr. Unger said: “I don't think this changes anything. I think AXA still wants a closer relationship (with AllianceBernstein) and is looking for more cooperation.”
When Mr. Kraus took the reins in December 2008 following the global financial crisis, the firm was in trouble. Poor returns and client redemptions was putting its AUM in a tailspin. At year-end 2007, global AUM was $800.4 billion. Four years later, that figure had dropped nearly in half, to $405.9 billion. AllianceBernstein experienced institutional net outflows of $7.9 billion for the quarter ended Dec. 31, 2011.
But Mr. Kraus' plan to course-correct the ship, which included building a broader, more balanced and client-focused institutional platform, ultimately paid off. In the second quarter of 2014, AllianceBernstein reported quarterly institutional net inflows of $6.8 billion and its highest quarterly total net inflow since 2007 of $8.3 billion.
Pension plans that have recently hired AllianceBernstein include State of Wisconsin Investment Board, Madison, which invested $375 million with AllianceBernstein in the “funds alpha” allocation in February.
SWIB spokeswoman Vicki Hearing declined to comment on how the leadership change at AllianceBernstein might affect its relationship with the board, which oversees a total of $104.6 billion in assets, including the Wisconsin Retirement System's $96.4 billion.
Last year, the Oklahoma Police Pension & Retirement System, Oklahoma City, hired AllianceBernstein to manage up to $65 million in emerging markets equity. Steven Snyder, executive director and chief investment officer of the $2.2 billion plan, said in an email that Mr. Kraus' termination was not cause for concern.
“We, and our consultants, have had conversations with AB and their EM portfolio team and we have no concerns regarding the changes in the C-suite at AB,” said Mr. Snyder.
Staying on course
Based on the May 1 conference call, AXA does not plan to make many substantial changes to the way AllianceBernstein (AB) manages money. Mr. Bernstein said in the call that after looking closely at the business, he thinks “it has a very sound strategy and foundation. And I think the goals that this management team and Peter have set are both ambitious and achievable. And so we intend to build from these foundations from here.”
Mr. Ungar noted he didn't think AXA was “massively against what's been going on recently.”
“I don't believe this is a sign that AB plans to shed its active management,” Mr. Ungar added. “The new CEO is Seth Bernstein; they didn't go to Vanguard, didn't go to State Street, they brought in somebody from an active manager.”
AB spokesman Jonathan Freedman and AXA spokeswoman Jennifer Recine said Messrs. Duverne and Bernstein were not available for comment further.
This article originally appeared in the May 15, 2017 print issue as, "Shakeup at AllianceBernstein surprises many in the industry".