Neuberger Berman has continued to evolve in response to the needs of big institutional asset owners around the world, but CEO George Walker is fond of pointing out what hasn’t changed for the firm, including its commitment to go global and its focus on building out private markets capabilities.
Read on for the second installment of Pensions & Investments Face to Face interview with Walker.
Q: Looking at the steady stream of teams and capabilities Neuberger has added over the years, the phrase "permanent revolution" comes to mind.
A: Frankly, very little has changed. We picked our North Star (and) stayed true to it. We knew what we wanted to build. When we started off, 98% of our revenues were domestic and we wanted to build a global firm. We’ve made huge progress in our rankings in Japan and China but we still have a long way to go on that journey.
Q: Next stop?
A: In the short term, we’re focusing a lot on the GCC (the Gulf Cooperation Council region) where we’ve not achieved a similar level of success but want to. It has some of the most sophisticated investors in the world and there’s no reason we shouldn’t have the same level of success there that we’ve had in markets like Canada or Japan or the Netherlands or Italy or Germany or Switzerland. We will be investing materially to accomplish that over the course of the next 20 years.
Q: And Neuberger’s private markets journey?
A: We now have, depending on how you slice and dice it, $175 billion in various flavors of alternatives. We started with a fund-of-funds business, then added a secondaries capability, then a co-invest capability, which is now a huge part of what we do, then private debt, then capital solutions, and still much more to do. We will continue to find one or two new things a year where we think we can drive real value for clients, that we’ll embrace, and a lot of that is, frankly, clients taking us there, (building) on deep partnerships.
Working closely with important insurers, understanding what they need, helping them solve problems — that’s taken us to new spaces like private placement debt, something we were not doing five years ago and now have a terrific team. We’ve become quite a large manager for insurance companies, at $75 billion.
Q: When it comes to partnerships with big institutional asset owners, is it a case of the more, the merrier? Or does the time consuming nature of those relationships force you to pick and choose?
A: There’s no doubt that a lot of the ways that we’ve grown are perhaps limiting, in the sense that we’re not making widgets that are infinitely scalable. We’re not the biggest by far. We don’t aspire to be the biggest. We want to have really great relationships, to really deliver for clients, to really invest in their success. And if that (excludes us from) the ranks of the largest firms, that’s fine. We don’t celebrate AUM. We cannot have an infinite number of close partnerships with major insurers or sovereign wealth funds or pension plans. It's a different business.
Our relationship with clients is deeply consultative. I just had lunch yesterday with the CIO of one of the largest plans in the world, thinking through what they’re trying to accomplish with their fixed income investing, a lot of which they do in-house, but there are spaces they’re not pursuing where they recognize there’s alpha. How can we do that? What opportunities do we have to collaborate? We’re very comfortable partnering for a period and then getting fired as they build in-house capabilities. For most managers, the more (big clients) manage in-house, the less opportunity for them. For Neuberger, the more money they manage in-house, the greater the opportunity for us to collaborate.
Q: Will public and private markets continue to be seen as two different animals or will the distinction gradually disappear?
A: The world has always viewed them as sort of radically different but I never have. I think the lines are absolutely blurring.
At the end of the day, it’s just investing. We have a number of mandates … where people are saying ‘we’d like to invest in credit and here’s our liquidity needs. You figure out where we should invest’ — joint public and private, grounded in what are the liquidity needs and the return objectives of those clients. Most investors have far more liquid portfolios than their behavior would suggest they need.
There is an unnamed client that we are partnering with — one of the largest defined contribution plans in the world — where we are managing a private markets portfolio that fits into (their) target date funds.
Q: Do you see target-date funds as the best way to get private investments into DC plans?
A: I do. If you ask me to predict, I think the way it will be introduced will be as a portion of a target-date fund, such that the investor can decide ‘do I want totally liquid or do I want something that’s illiquid but priced daily, weekly, monthly.' So, I think we have to make it simple and clear, and that it’s likely to be a small part of a larger thing rather than a discrete, standalone option.
Otherwise, we’re doing a lot of work on packaging and how we deliver strategies to people. So, we’ve upgraded our product development capabilities and our marketing capabilities. You see it in permanent capital vehicles and active ETFs and things like that. We brought on a terrific guy from McKinsey, Kevin Cho, who has a great team and who’s been laser focused on it, because when it was 5% of our time, we just weren’t getting the job done.
Q: A year or two ago, you seemed to be sounding the alarm about the inexorable growth of the U.S. national debt, saying the longer we wait to address it, the more dangerous it will become. But now, despite a new administration in Washington seemingly poised to add trillions of dollars to the debt, recent outlook pieces on Neuberger’s website have sounded fairly sanguine about the coming year. How to reconcile?
A: I think it’s one of, if not the top, long-term challenge facing the country. But in the context of the long end of the curve moving significantly, it’s a relatively low probability event in the short term. It is like a 50-year old who is smoking four packs a day. I don’t expect that they will die of lung cancer in the near term but I know it’s really bad and that this will not end well.
It’s a behavioral finance problem. Democracies around the world have not done a great job of dealing with long-term challenges. We do a much better job of focusing our attention on the fires that are raging today and a disappointingly poor job of tending to the forest and clearing the underbrush and doing the unrecognized that’s that will make the country better for our kids and our grandkids.
