If they build it, will assets come?

NEW YORK — George H. Walker plans to build — not buy — what Lehman Brothers' asset management business needs.

Mr. Walker is implementing an organic growth plan, building investment capabilities through strategic recruitment of talented managers, with a focus on maintaining performance and satisfying institutional investor demand for alternative strategies like hedge funds, private equity, portable alpha and liability driven investments, as well as traditional asset classes.

"The Street might be happy if we did something dramatic, but that's not they way we're approaching it," Mr. Walker said in an interview.

Indeed, many observers expected Mr. Walker to go on an acquisition spree.

"Lehman is well-known for being very transaction-oriented, rather than strategic," said David Barrett, managing partner of executive recruiters David Barrett Partners, New York. "George Walker's challenge is to change … that mentality, to one that's longer term, more strategic. George has a good reputation. … He stands a good chance of being successful at (changing) the Lehman culture."

Consultants expected Lehman to seek an institutional equity powerhouse. The firm's only equity shop is Neuberger Berman Inc., New York, which consultant Michael Rosen said is usually classified by investment consultants as a mutual fund and 401(k) plan manager. Mr. Rosen is a principal at Angeles Investment Advisors LP, Santa Monica, Calif.

"Organic growth and M&A are equally prevalent strategies among fund managers right now, and in fact, some firms use both in combination," Ben Phillips, managing director of Putnam Lovell NBF Securities, a New York investment bank, said in an e-mail. "Organic growth permits a firm to maintain most, if not, all aspects of its culture and investment process, but it takes significant time. Acquisitions reduce the time to market, but must be handled carefully to minimize disruption to the personnel that drive performance inside a fund management house."

Said Mr. Walker: "It's pretty straightforward to see how it will play out. By hiring the right people, focusing on performance and having some patience, we will take a longer-term view. We're aiming to skate where the puck is going, not to where it is now or where it's been. This can't be done the right way fast."

Mr. Walker's defection to Lehman from his post as managing director, partner and head of alternative investment strategies within Goldman Sachs Asset Management, New York, was one of the most talked-about executive moves last year. He is now global head of investment management and managing director of New York-based Lehman Brothers Holdings Inc.

"Everyone in this universe is watching what George Walker will do at Lehman," said banker Ted J. Gooden, vice president, Berkshire Capital Securities LLC, New York.

Mr. Walker said: "Lehman has a terrific opportunity to build an entity with an incredibly meaningful institutional client base.

"The strength and performance of the teams — fixed income, quantitative strategies, EAFE, domestic growth equity, private equity — is exciting from my perspective. The investment capabilities that exist here at Lehman today are materially stronger than what some people may think."

Mr. Walker's work is cut out for him in terms of catching the competition. Lehman significantly trails its three main Wall Street competitors in the asset management ranks. As of Nov. 30, Lehman managed $225 billion, compared to $1 trillion for JPMorgan Chase & Co. (as of Dec. 31); $676 billion for Goldman Sachs & Co. (as of Nov. 24); and $460 billion for Morgan Stanley (as of Nov. 30).

Assets under management in hedge fund of funds, private equity and global asset allocation strategies increased by 81% to $49 billion from $27 billion in the two-plus years Mr. Walker headed Goldman Sachs' global alternatives unit.

Lehman's has $95 billion in equities managed principally by Neuberger Berman; $61 billion in fixed income and $48 billion in money market funds managed principally by Lehman Bothers Asset Management LLC, Chicago; and $21 billion in alternatives managed by Lehman Brothers Holdings.

Many sources believe Mr. Walker's experience, skill set and personality will get the job done at Lehman Brothers.

One who knows him well described Mr. Walker as having an "extraordinary strategic mind; smart as hell; outworks nearly everyone; processes information and issues faster than most; humble; decent; generous; loyal … a total Boy Scout ... and more liberal than you would think." The source, who asked for anonymity, was referring to Mr. Walker's pedigree as second cousin of President George W. Bush, and his involvement in Republican politics and fund raising.

"I take him at his word. George Walker may not acquire businesses — other than small, opportunistic nibbles here and there — say a $500 million small-cap value manager — but he will be aggressive in acquiring people and teams," said another source, an investment banker who asked not to be identified.

But Mr. Walker faces stiff competition for top talent.

"Demand (from) employers far outstrips quality supply," said Debra J. Brown, managing director in the investment management practice of Russell Reynolds Associates Inc., New York. "For certain functions — such as institutional sales, chief investment officers, asset allocators, international equity and structured fixed-income portfolio managers, quantitative talent in general, and infrastructure — the market is booming and compensation is rising rapidly. Lots of recent movement in these areas makes it unlikely folks will move again, which makes the market even tighter," she said.

"That said, the top firms can still get the attention of the best players and from where we sit, Lehman's outlook looks very positive with respect to its drawing power. They have the makings of a complete platform, which many other asset managers are interested in developing," Ms. Brown said.

Berkshire's Mr. Gooden, pointing to Lehman's extraordinary growth in investment banking since the firm went public 12 years ago, said; "It's clear that the company believes that now is the time to expand asset management and that George is the person to do it."

But Mr. Gooden said Mr. Walker's challenges are significant. For example, to achieve scale, Mr. Gooden said Lehman's current practice of taking 20% ownership stakes in hedge fund companies is "too conservative. If they really want to do this right, it's going to be very tough to do it with five, 10 and 20 percent stakes. If they really want to achieve scale in asset management, it's going to take a major acquisition."

Increasing Lehman's institutional client base also will be tough: Just one-third of Lehman's assets are from institutional investors.

A consultant noted Lehman has "never gained traction in institutional asset management."

But Mr. Walker said, "Being part of a world-class investment bank, Lehman's asset management teams are able to deliver alpha in many ways. We can produce it and then can move it in a structured sense. We are very comfortable with using the tool."