HOUSTON - Cisneros Asset Management, rocked by the loss of nearly two-thirds of its assets in just over two months, is closing.
The Houston-based minority fixed-income money manager was founded by Henry Cisneros, who is President Clinton's secretary of Housing and Urban Development. He sold his shares when he became housing secretary in 1993.
In a letter to clients, Cisneros' management said client relationships will be terminated effective Aug. 13. Several of the remaining clients already have made provisions to move their assets.
At its peak, Cisneros had $760 million in assets, but had lost nearly $500 million in June and July as clients terminated the firm.
The firm suffered three blows that led to its demise - the loss of its subadviser and two failed sale attempts.
Criterion Investment Management Co., which had been handling the majority of Cisneros' assets as subadviser, ended the relationship when it was sold to Nicholas-Applegate Capital Management, San Diego. After the sale closed in May, Criterion's fixed-income team stayed in Houston under Terence Ellis, who will remain as head of fixed income for Nicholas-Applegate.
Several Cisneros clients chose to terminate Cisneros and stay with the Criterion team.
The Municipal Employees' Annuity and Benefit Fund of Chicago moved its assets in July to Nicholas-Applegate.
"We had a good working relationship with Cisneros, and we sensed something was going on. You don't want to get caught when it's too late," said James Stack, executive director of the $3.2 billion Chicago fund. Moving the $90 million fixed-income allocation from Cisneros to the Nicholas-Applegate team was "a natural switch," he said.
After the announcement of Criterion's sale, two failed sale attempts jolted Cisneros.
The first was to Smith, Graham & Co., another Houston minority-owned fixed-income manager. Smith, Graham reached an agreement in April with the board of directors of Cisneros to buy the firm. But the bid was rejected by Cisneros shareholders, which included West Loop Investments, L.P., an acquisition partnership owned by First Capital Asset Management Co., New York.
Then, First Capital reached an agreement June 8 to acquire all shares of Cisneros in an all-cash transaction; the amount was not disclosed. First Capital is a minority-owned holding company.
Under the planned First Capital acquisition, the bulk of Cisneros' assets would be transferred from Criterion to its new subadviser, U.S. Trust of Texas. Gilbert Garcia, Cisneros' president, would have remained with the firm only for a transitional period.
Clients were concerned those changes would create a fundamentally different firm, said Valerian Butler-Smith, president of First Capital.
Many terminated Cisneros, reducing its asset base and driving down the price First Capital was willing to pay.
First Capital withdrew its offer after the two sides couldn't renegotiate a deal, said Mr. Butler-Smith.
By early July, Cisneros had lost almost $500 million in assets under management. In mid-July, shareholders voted to dissolve the company, said Mr. Garcia. Clients were happy with Cisneros' services and performance, but just could not accept so many changes at once, he said.
"The money management business is a relationship business. This is the lesson," said Mr. Garcia.
The $19 million Laredo (Texas) Firemen's Relief & Retirement Fund left its assets with the Criterion team while the board decides how to reassign them, said Conrado M. Heim Jr., finance director. The entire fund had been managed by Cisneros. The fund is completing a search for a consultant, who will oversee a subsequent search for a manager or managers to replace Cisneros, said Mr. Heim.
Plumbers & Pipefitters Local No. 42, San Antonio, had a $2 million fixed-income allocation with Cisneros, which was handled on an advisory basis by Merrill Lynch Consulting Services, said Kirby Whitehead, business manager for the $22 million fund. Merrill will manage the money until the board meets Aug. 15 to decide what to do, said Mr. Whitehead. He added it is likely the assets will be re-assigned to Merrill.
But many more clients, faced with a perceived instability in management and the imminent departure of Criterion, already had terminated the firm before the shutdown:
Sierra Pacific Power Co., Reno, moved its allocation three to four months ago, said acting Treasurer Victor Pe?a. The cash and bond assignment, between $8 million and $10 million, was given to Loomis Sayles & Co., one of the other managers for the $170 million fund.
The $6 billion Public School Teachers' Pension and Retirement Fund of Chicago transferred the $70 million managed by Cisneros to an index fund managed by American National Bank of Chicago as of July 3, said a spokesman for board President Mary Sharon Riley.
The $950 million San Jose (Calif.) Fire and Police Department Retirement Plan also terminated Cisneros after the sale announcement. It turned over a $15 million fixed-income allocation to Smith, Graham, said Edward Overton, administrator.
The $500 million defined benefit plan of Houston Industries Inc., Houston, reassigned an intermediate fixed-income allocation "in the $10 million range" among its existing managers about two months ago, said the fund's consultant, Scott Freeman of LCG Associates in Dallas.
The $825 million defined benefit pension fund of Central & South West Corp., Dallas, reassigned a $60 million fixed-income account to Criterion after the announcement of the planned sale to First Capital.
"We were concerned about the continuity of the account, and we decided to move the assets," said Steve Kiser, benefit funding consultant.
The $850 million Denver (Colo.) Employees' Retirement Plan terminated Cisneros at the end of June and temporarily reassigned the $25 million allocation among its other fixed-income managers until the fund can finish a search for a replacement.
"This was the second of the potential sales and, in our opinion, attention to the portfolios was not being paid in the time being," said Michael Heitzmann. executive director.
With the Cisneros acquisition scuttled, First Capital still plans to acquire a minority-owned fixed-income manager, said Mr. Butler-Smith. The holding company's goal is to build an umbrella organization of minority money managers representing a variety of asset classes. The firm already owns First Capital Advisers, New York, an equity manager with $50 million in assets.
The collapse of Cisneros is a setback for First Capital - it reportedly cost the firm $250,000 in good faith money and other due diligence costs - but Mr. Butler-Smith said that's a cost of doing business. First Capital is in discussions to acquire two other minority-owned equity management firms with combined assets of about $1 billion, and a minority-owned broker-dealer firm, he said. He wouldn't identify the firms.