Victory Capital eager to add more to stable

Victory Capital Management Inc. officials are on the prowl.

After buying two money management firms in the past eight months — most recently, Compass Efficient Model Portfolios LLC — executives at the Cleveland-based firm are looking to acquire additional boutiques. They particularly are looking at alternatives managers as part of an expansion plan that already has seen Victory more than double its assets under management.

“This is an exciting time to be in the money management industry, but given the dramatic changes and challenges, there are going to be a lot of winners and losers,” Jim FitzGerald, Victory's vice chairman, said in an interview.

Mr. FitzGerald said Victory plans to succeed in a climate in which smaller firms are being challenged because of increasing regulatory burdens and difficulty maintaining adequate distribution in the face of an increasingly competitive environment and rising technology costs.

Victory's plan is to buy smaller firms and let their investment teams do what they do best — invest — while giving them ownership stakes in the new company and providing them with centralized staff to handle regulatory matters, distribution and technology, he said.

Under Victory's business model, individual firms still maintain their own names and identities, Mr. FitzGerald said.

The model has been successfully mastered by Affiliated Managers Group Inc., for example, but others — including Legg Mason Inc. — have struggled, said Russell Campbell, president of Las Vegas-based Your Second Opinion LLC, a consultant to money managers.

“The success or failure often comes down to implementation,” Mr. Campbell said, noting that integrating technology, culture and people from different organizations into one company can be fraught with challenges.

Victory itself didn't exist as an independent firm until August 2013. Top officials of what was the asset management arm of KeyCorp, aided by private equity firm Crestview Partners, that month closed on a $246 million deal to create an independent asset management firm. Officials of publicly traded KeyCorp said at the time the move was part of a strategy to focus on its core banking operations.

Victory completed its first purchase — of Munder Capital Management, Birmingham, Mich. — in October. Munder managed about $18 billion, doubling Victory's assets.

On Dec. 1, Victory announced its second deal, acquiring the business of Compass Efficient Model Portfolios, Nashville, Tenn., which has $1 billion in AUM, mostly in passive smart beta strategies.

Mr. FitzGerald, who was Munder Capital's president before the acquisition, said Victory is looking to acquire money management firms in areas such as real estate, commodities and liquid alternatives.

“We have a tremendous opportunity to grow the firm significantly,” he said. “If we do everything right, we will end up being a lot bigger in five years.”

Mr. FitzGerald said the firm has not set a goal for the number of firms it wants to acquire or the amount of assets under management it would like to reach.

He said a key attraction for Munder to join Victory was the opportunity for increased distribution, particularly in the institutional area. He said Munder's old distribution team of 12 is now part of a 50-person staff.

“Distribution was always important, but it's more important today than ever before. There are a lot more products out there and it's become more competitive,” he said. “The real trick is how do you deal with it: Are you a deer in the headlights and stay frozen?”

Institutional separate accounts were $15.3 billion of the $36.4 billion combined assets under management for Victory and Munder as of Nov. 30, company data show. Another $6.6 billion were in institutional and retirement mutual fund share classes and collective funds.

The increased cost of running a money management firm is driving consolidation among smaller firms, said John Temple, president of Cambridge International Partners Inc., New York.

Having good investment performance is not enough these days for a firm to build its AUM, he said. Indeed, “the value of having a distribution platform has gone up,” he said.

Steven Hammers, co-founder and chief investment officer of Compass EMP, said he had talked to 20 different suitors before deciding to go with Victory. He said he liked the company's approach to letting Compass manage the investment process while Victory provided the overall support services.

He said his firm's growth was hampered by its small — five person — distribution staff.

“Victory wanted to have an emphasis on passive, alternative indexing as well as alternative products,“ he said. “So, we had the products, they had the distribution, they had the technology, they had the relationship with institutional investors. That's what really made the acquisition make sense.”

But key to Victory's success is the employees' “significant ownership stake,” Victory Chairman and CEO David Brown said in an interview. He would not provide the breakdown.

Data from eVestment LLC, Marietta, Ga., show that following the acquisition of Munder, about 60% of the firm was held by Crestview Partners; 20% jointly held by New York-based Reverence Capital Partners and the Ohio State Teachers' Retirement System, Columbus; and 20% by employees.

Mr. Brown said Victory is intent on expanding its boutique model.

“My belief is the asset management industry is maturing. In any maturing industry, there is consolidation; in that situation, you are an acquiree or an acquirer, “ he said.

But an acquisition will be made only if the new firm adds to the overall plan of enhancing investment capabilities for clients. “I would not view us as a serial acquirer,” he said.

On the Victory Capital Management side, strategies' underperformance has led to asset declines. Victory's assets under management of $18 billion was a drop of more than 11% from its $29.4 billion as of Sept. 30, 2011, eVestment data showed.

Victory's largest institutional strategy, diversified equity, has seen separate account assets under management decline to $2.5 billion as of Sept. 30, from $7.8 billion on Sept. 30, 2007.

The strategy has underperformed its benchmark, the Standard & Poor's 500 index, for the one- and five-year periods ended Sept. 30, but outperformed in the three-year period, eVestment data show.

For the year, the strategy returned 16.78% vs. the benchmark's 19.73%; for three years, the strategy's annualized results of 24.65% topped the benchmark's 22.99%; and for five years, the annualized return was 13.84% vs. the benchmark's 15.7%

Jacqueline Condie Ruegger, a spokeswoman for Victory, said the decline in assets since September 2007 is primarily due to Victory exiting non-core businesses or products, and assets retained by KeyCorp after the buyout.

Munder AUM has been more stable. Its approximately $18 billion in assets is up from $12.5 billion as of Sept. 30, 2011, according to eVestment. Munder's numbers do include $5 billion from Integrity Asset Management, which it acquired in 2011. n