Ralph Schlosstein was on the rebound when he joined Evercore Partners Inc. as president and CEO in May 2009, with a mission to build that publicly listed investment bank's money management business. Alternatives holding company HighView Investment Group, the executive's first move after leaving his perch as co-founder and president of BlackRock Inc. in early 2008, was undercut by the market's implosion later that year.
Mr. Schlosstein ultimately decided to return the $600 million he had raised from investors just ahead of Lehman Brothers Holdings' confidence-crushing bankruptcy. But the closure of HighView's door immediately saw others open for Mr. Schlosstein. The industry veteran said he left a “phenomenal run” at BlackRock, where he helped oversee the acquisitions of State Street Research & Management, Merrill Lynch Investment Managers and Quellos Group LLC, in search of new challenges.
The game plan for Evercore's money management growth bears little resemblance to BlackRock's successful strategy, which melded a series of hefty money management acquisitions into a “One BlackRock” organization. Instead, Evercore, as a holding company, will take minority stakes in partner firms. Its first two big investments under Mr. Schlosstein — in private equity firm Trilantic Capital Partners and equity manager Atalanta Sosnoff Capital LLC — were announced in the first quarter.
What does a guy who helped build BlackRock do for a second act? I had a phenomenal run at Blackrock. Larry (Fink) and I are still extremely close — there's never been a moment in the 20 years (I was No. 2 at BlackRock) that I said "I wish he weren't here, and that I had his job." So, it was about another challenge. I really do enjoy building businesses — entrepreneurial businesses.
Will the environment favoring an advisory firm with a money management arm go in and out of favor? Here's what I think will happen in the securities and banking industry. There'll be 10 to 12 really big firms — financial supermarkets — with huge amounts of capital, competing on the basis of that capital, (as well as) a bunch of small investment banking boutiques. And then there'll be room for two or three firms in the middle. One of them is there already: Lazard — a bigger, more global version of Evercore. We are, I believe, the firm that has the best chance to be the second of those firms, with a very strong money management business, a very strong global advisory business and an institutional equities business to raise capital for our clients. No proprietary trading — steering clear of the inevitable conflicts in having a lot of capital to invest on your own behalf, (while) being an agent and adviser for your clients.
Does that midtier status imply a limit on Evercore's growth? I think there's a limit to how much advisory business you can do without a balance sheet. Money management is probably the one area where we're not particularly constrained, because we're a peanut and it's a massive business. The challenge there is finding the right kind of businesses.
In Evercore's latest results, money management remained a cost center. (For now, it's) a $5 billion collection of early-stage businesses that I inherited, all of which are doing pretty well. We're starting to add to that through acquisitions, but we have very tough standards for what we're interesting in buying — very high-quality, (repeatable) institutional investment processes; people who fit well with our partnership-type culture. And we're a holding company, so we're going to own pieces of businesses, and a requirement for us is that the management of (any firm we buy into), including the portfolio managers, own a significant piece of equity in these firms as well, to ensure an alignment of interests. So the two (first-quarter) transactions we did — Atalanta Sosnoff, we bought 49%. The other transaction we did, Trilantic, we own a much smaller portion (because) I believe in private equity, if an institution owns more than 10% to 15% of the top line of the business, you ultimately run the risk of it being destabilized.
What do you and Evercore bring to the table for money management affiliates? First, we can provide a balance sheet that helps with transitions in ownership; second, we have relationships that can be helpful in capital-raising for certain types of businesses; third, we happen to be led by an executive who has some modicum of experience in the money management business ...
Yourself? Yes ... look, the truth is, if you're selling your business outright you care a little bit less about who your partner is. If you co-own your business, you care a lot about the culture, ethics and reputation of the firm, and the knowledge base of the senior executives. So I think having a great brand, which Evercore does have, and a CEO who's quite knowledgeable about the money management business and has dealt with almost any issue that these people confront in the evolution of their businesses, make us a really good partner to high-quality firms.
Which will remain independent? It's not inconceivable that at some point two of them might conclude, it makes sense for us to join together (for the) economies of scale. But the basic premise we start with is: We'll give you lots of help and coaching, but at the end of the day we're looking for you to take the lead in continuing to grow the value of the equity we own together. We're more in the (Legg Mason, Affiliated Managers Group, BNY Mellon Asset Management) model than in the BlackRock model, which you can only do with scale. We obviously don't have that. We're smaller. If you're not scale, you have to pick the holding company model.
You could eventually achieve scale. Yeah, but when you enter into a partnership with a bunch of people, you really can't go back to them afterward and say, "Remember what I told you in 2010? In 2018, we're going to merge all these things together." That's not a way one builds a reputation for being a great place to partner with.
Is your approach to building the business more strategic or opportunistic? We have a very clear strategy, but the execution is by definition opportunistic. I get asked all the time: How big is your money management business going to be? We would be foolish to set any kind of goal. When we can find great businesses, with great people, great cultures that want to affiliate with us, we should try to do every one of those we can. If four of them come along in one quarter, we should do them. If none come along for two years, we should sit on the sidelines.
Your rough preferences? Institutional, higher value-added products ... so equities, and further out from equities to whatever is the higher-return, higher-volatility type of businesses. Distressed real estate, private equity, long-short equity. I think those are the growth parts of the money management business. I think the active equities business will become more focused on strategies designed to produce not 50 to 75 basis points of excess return, but a couple of hundred points.
If your friend Mr. Fink is right in saying institutional clients will increasingly opt to deal with a smaller number of big money managers, capable of offering a full suite of coordinated strategies, are you on the right path? I don't disagree with that. More large investors today are asking ... “What should I do with my money.” That's a growing — but still a relatively small — segment of the institutional marketplace. ... There's still a lot of room in the business (for smaller firms).