Norton Reamer, the man who added "revenue sharing" to the money management lexicon a quarter-century ago with the launch of United Asset Management, is back, at age 69 after a brief retirement, and he's looking to shake up the industry again. Mr. Reamer launched Asset Management Finance Corp. last year, pledging to open a new front in money management finance. His latest venture, like the previous one, is anchored on revenue sharing, but with a twist. The old model called for money managers to sell 100% of their equity to UAM while entering into a permanent revenue-sharing deal. The new model calls for a temporary revenue-sharing deal that allows money managers to keep their equity. Mr. Reamer — who splits his time between New York and Boston, when he's not on the road — says AMF's model will allow independent money managers to stay independent while clearing business hurdles that forced previous generations of owners to sell out. With new funding from Pacific Life Insurance Co. and a bank credit line on the way, AMF is ready to roll. Mr. Reamer sat down recently with reporter Douglas Appell in Boston to discuss AMF's prospects.
Q What have you been doing since Old Mutual bought UAM in 2000?
A I have a number of directorships. I've been doing a lot of pro bono charitable things, and consulting. I manage some of my own money.
Q The idea for Asset Management Finance wasn't yours?
A While one core element was something I think I can claim to have invented, the concept of revenue sharing, the innovations that made this thing so exciting to me, were developed by the structured finance team at Putnam Lovell (NBF Securities). They said: "Would you be interested in being involved with this idea?" And I said, "You bet." Initially my thought was I'd be the chairman and help to promote it but that someone else would be president. In the end, they approached me to be president and CEO.
Q What were the innovations?
A … These guys came along and said, "Norton, we think we have five interesting innovations that are the basis for an exciting new vehicle in this industry. No. 1: Why does revenue sharing have to be linked to ownership? Why couldn't it be separated from ownership and become a financing mechanism? No. 2: Why does revenue sharing have to be perpetual? Why couldn't it be for a term — say seven to 20 years?" The third one was, "Norton, we think we have quantitative techniques to evaluate money managers which, when added to the experience you have, will produce more precise valuations, enhancing the deal underwriting process." No. 4 was: "You know, UAM owned 50 firms, you were broadly diversified, but we think we can make the diversification better." In the late 1990s, UAM had issues because we were too heavily on the value side, and value managers were lagging. So their concept was: "We can help by having quantitative measures…of the money managers to help create a truly diversified portfolio." And No. 5: They said "we think we can build a much more efficient management structure by securitizing baskets of these ‘revenue sharing interests' and thereby get a much lower cost of capital."
Q A winning formula?
A It was those five innovations that got me saying, whoa, this is exciting. Incidentally, these five are the underlying factors in the patent application that we filed. These innovations, like the quantitative techniques, are new and we're interested in creating an environment that helps us to be, if possible, the only player, but certainly one of the very few players.
Q What will money managers turn to AMF for?
A No. 1, it could be used for a liquidity event. The principals of a firm decide they would like to be more diversified in their own personal portfolios. Up until now, you could either sell the company to get liquidity, or you could borrow from a bank and take on God knows what unnerving fixed obligations, personal recourse and so on. Selling a firm is the nuclear alternative: it's a big event. It's change of control, and incidentally it requires client consent. This type of transaction doesn't require client consent. Consultants love this idea because it basically doesn't disturb a culture. I've got to assume that clients will like it too, because instead of the end of the firm as they knew it, it's the perpetuation of the firm as they knew it. The second use can be to transfer equity ownership within the firm — from the old-timers to the new-timers. The new-timers can't afford to pay for this, and up until now there really wasn't a good mechanism. And this can be used for a whole welter of more conventional uses. Many firms have founding partners, had a private equity firm get them started. It can be used to take that early group of investors out. It's also perfect for spinoffs.
Q Is this an idea whose time has come?
A I think the conditions these days are very propitious for this. Two things have happened. One, there's been tremendous disillusionment with the kind of deals that were done over the last five or 10 years. Buyers have found that things didn't work out the way they had hoped. Sellers have found that the synergies weren't as attractive as they had expected. At the same time everyone has come to feel, I certainly feel, that the most perfect money manager is an independent money manager, because the whole entrepreneurial spirit that produces good work as a money manager goes best if you're independent. You've seen it over and over again. …
Q What is your target market?
A Our market is money managers with between $1 billion and $40 billion in assets under management, a universe with over 1,000 firms. AMF offers a terrifically flexible technique, and once we get to know a firm, we hope for lots of repeat business. We've come to realize that we're not selling a product. We're building a relationship that we hope will last.
Q Will investment bankers in the money management space and asset consolidators see you as a competitor?
A I don't think they need to. If someone wants to sell their firm, they'll sell it. We're here to help firms to remain independent while revolving ownership. (We would tell an investment banker) when you undertake a transaction, we can be in there with you, providing an additional source of financing. And we can be there five years later when you want to sell your interest to help the partners take you out.
Q What impact could this idea have on the industry?
A There's been about 100 or so deals of some sort a year, but I think there could be 200 deals a year if you've got a flexible service like this. So I think there'll be a tremendous increase in the number of transactions. They won't be invasive transactions like an acquisition, but there'll be many more transactions, and we'd like to do as many of that increment as possible.