The Pension Benefit Guaranty Corp.'s emerging manager search rankled some small firms, whose executives argue the RFP was restrictive and arbitrary.
Managers and other industry observers questioned the request for proposals, saying it set the most restrictive parameters for the candidates' size they had ever seen.
The RFP sets a minimum of $500 million and maximum $750 million in assets under management.
Other requirements include a minimum track record of three years as of Sept. 30, 1994, at least one other tax-exempt institutional client and a positive net worth among the firm's partners.
Some emerging managers argue a $250 million range between floor and ceiling for assets under management is too thin a slice of the money management marketplace.
"I applaud what they're trying to do, but they're missing the mark," said Mona Williams, principal of Bond, Procope Capital Management. The New York firm has $340 million under management, not enough to qualify for the search.
Indeed, only five firms listed in Pensions & Investments' 1994 Directory of Minority- and Women-Owned Investment Managers fit the size criteria.
Typically, an emerging manager search tends to take assets under management as a secondary criteria and sets the limits between $50 million and $500 million, said Christian Washington, principal of the consulting firm Washington Hackett Poitevien & Co., New Orleans. Most "regular" searches set an arbitrary minimum of $500 million in assets, so a manager with more than $500 million is already playing in a different field, he said.
Mr. Washington said he would have advised the PBGC to lower the search threshold and do more due diligence on the firms' solvency and liquidity. The investment risk inherent in a small firm is no greater than when dealing with a larger firm; the only potential difference would be the emerging firms' solvency, he said.
"I've never seen an RFP drafted like this. It's unprecedented," said Edward H. Seidle, president of Anvil Institutional Services, Inc., a minority-owned brokerage firm in New York. "It legitimately raises the a question: 'What's all this about?'*"
According to federal procurement rules, a search found to unduly deter competition can be reviewed and repeated, said Mr. Seidle, a former Securities and Exchange Commission attorney who occasionally advises clients unofficially on their emerging manager searches.
"It's not a done deal," he said.
Mr. Seidle said he has heard managers have complained to the PBGC, but without someone making a formal complaint in writing, the PBGC is not obligated to review the process. If there is such a formal complaint, the process could be reviewed and the RFP redrawn if it is found the original request unduly deterred competition, he said.
Bond Procope's Ms. Williams said she had written to the PBGC expressing her concern, and plans to follow up. She said she originally had called the PBGC and spoken to the officials in charge of the RFP and had been discouraged.
"They were very clear: 'Don't even waste your time if you don't meet the qualifications,'" she said.
PBGC officials referred all calls to agency spokeswoman Jane Hoden. She said if no acceptable responses are received, the PBGC may decide to conduct a new search using other criteria. The response period closed Feb. 6; responses are still being reviewed and there is no decision on what will be done next, she said. She refused to disclose the number of proposals received, citing federal procurement rules.
The search is looking for one or perhaps two emerging managers to manage $50 million each in domestic equities. The PBGC is looking for a manager with unusual and creative approaches, Ms. Hoden said.
The RFP chose to limit the total assets to $750 million to ensure the managers are not constrained by a workload that prevents them from focusing on new ideas and innovations, while the floor of $500 million was chosen to ensure the manager has committed enough resources to the product to limit the PBGC's risk in choosing at firm, she said.
"We think it is a great idea, but the way this RFP was structured, I would say it eliminates 95% of emerging firms," said Adela Cepeda, managing director of Abacus Financial Group Inc., Chicago, a 3-year-old firm with $300 million in assets. A floor of $100 million in assets would have been more appropriate, she said.
Such stringent requirements are counterproductive, said Ms. Cepeda. When funds send out an RFP, perhaps 50% of eligible managers won't respond, because the process requires so much work, she said. So, if the RFP is that limited to begin with, then the responses will be even fewer, she said.
The PBGC search underscores a nascent trend of including candidates other than minority- and women-owned firms in emerging manager rosters.
While the term "emerging manager" has been interpreted by many to mean minority- and women-owned firms, some sponsors are looking beyond that definition. For example, Progress Investment Management, which has $950 million in its Progress Common Trust, is exploring adding managers who are not minority-and women-owned to the manager-of-managers program.
The PBGC is using the term emerging manager to mean any firm that meets the qualifications, regardless of the ethnicity or gender of the principals, said Ms. Hoden.
There are a number of firms in the PBGC's size range that could qualify for the search, said Washington Hackett's Mr. Washington. If the PBGC is searching for firms that are "hungry" and will try innovative approaches, they will find them, but they are shutting out a lot of talented managers who work for firms below $500 million, he said.
"I can't fault them completely and say it is a fruitless search," said Mr. Washington. "But you will shut out most of the traditional emerging managers that traditionally are minority- and woman-owned."
Among minority firms that have assets within the PBGC's range, at least one - New York-based Nakagama & Wallace Investment Management - was not able to compete. Although it has almost $700 million in assets, that total includes more than $400 million in assets in advisory relationships. The RFP required total assets include only discretionary assets.
William Greenbaum, the firm's head of marketing, said he understood the PBGC had to set some limits, but he added that a firm with $750 million in discretionary assets can compete in all searches.
"You're not that much of an emerging manager if you have $500 million," he said.
Said Elliot R. Detchon III, the firm's chief executive, investments: "If you're trying to find emerging firms, this is a backward way of doing it."
