Multiaffiliate boutique firms under pressure

Changes are afoot in the multiaffiliate segment of the investment industry as managers seek cost savings, efficiencies and better collaboration between affiliates — whether they like it or not.

From Boston-based BrightSphere Investment Group Inc.'s startling cost-cutting move to divest six of seven affiliate firms over the past year to the abrupt departure last month of nearly every member of the executive team of New York-based private equity manager GoldPoint Partners LLC over a disagreement about forced collaboration with other affiliates, industry observers are questioning what the future of the multimanager model might be.

"The value proposition of the multimanager model isn't broken, but it needs to be run very well with centralized services and cost controls," said Jonathan Stern, a partner at financial services merger specialist Berkshire Global Advisors LP, New York, in an interview.

Some multiaffiliate firms are experiencing problems and are making changes, sources said.

"There are numerous firms that have struggled to create enhanced enterprise value through the multimanager model," said William "Bing" Waldert Jr., managing director and head of U.S. research at Cerulli Associates Inc., Boston.

"Reading between the lines, to save costs, some firms are cutting affiliate companies that aren't working at a given time. The rotational nature of the investment industry creates tension between the owner and affiliates whose strategy is out of favor," Mr. Waldert said.

The issue of independence for affiliates is a frequent source of stress, Mr. Waldert said, noting "there's a natural tension associated with this model. Affiliates are happiest when the owner stays in the background."

Tension between affiliate GoldPoint Partners and its owner, New York Life Invesment Management LLC, was the impetus behind the resignation of six members of GoldPoint's seven-person executive team. The GoldPoint team took issue over the new direction of NYLIM's alternatives business, people with knowledge of the situation said.

The new direction NYLIM took includes increased collaboration on deals between its three alternatives boutiques and for executives at each of the boutique businesses to increase their skill sets across strategies, they said.

The departing GoldPoint executives are Thomas Haubenstricker, CEO; CIO Quint Barker; Vijay Palkar, head of the investment team; and managing principals Scott Iorio, Michael Kho and Binayak Mishra, the anonymous sources said.

Members of the departing team could not be reached for comment.

Eighteen months ago, NYLIM combined its three alternative investment boutique businesses — GoldPoint, Chicago-based Madison Capital Funding LLC, and PA Capital LLC, Richmond, Va. — under the new umbrella name New York Life Investments Alternatives, these people said.

NYLIM's alternatives business has $35 billion in assets under management. Of that total, GoldPoint accounts for about $15.5 billion. Madison Capital is a private credit manager while PA Capital invests in private equity, real assets and long/short equity. Madison Capital and PA Capital executives will take on additional responsibilities at GoldPoint.

"We have tremendous confidence in the leaders and staff across our alternative investments business who will continue to deliver outstanding service to our sponsors and clients and manage the funds consistent with their investment objectives during this transition period," a NYLIM spokesman said in an email.

NYLIM managed $650 billion as of March 31, according to its website.

Among other actions by multiaffiliate managers, BNY Mellon Investment Management, New York, completed the integration of Mellon Investments Corp.'s actively managed strategies and management teams to other affiliates on Sept. 1, said Hanneke Smits, CEO of BNY Mellon Investment Management.

Mellon Investments' fixed-income strategies moved to Insight Investment Management Ltd., London; equities and multiasset strategies moved to Newton Investment Management Ltd., London; and cash management strategies now reside within Dreyfus Cash Investment Strategies, part of BNY Mellon Adviser Inc., New York.

Mellon Investments retained investment of institutional indexed equity and fixed-income strategies.

While some industry sources questioned why BNY Mellon, which touts itself as a multiaffiliate manager, merged investment teams, Ms. Smits said the changes "reaffirm our commitment to a multimanager model because you need scale and specialization," which will be the result of bringing the teams together. She stressed that combining the firm's affiliates within the same asset classes "isn't a realignment to cut costs."

BNY Mellon Investment Management's eight affiliates managed a total of $2.3 trillion as of June 30.

Multiaffiliate manager BrightSphere Investment Management took a different reorganization route than other managers.

It completed the sale of its second-to-last affiliate — timber and natural resources specialist Campbell Global LLC, Portland, Ore., with $5.3 billion under management — to J.P. Morgan Asset Management, New York, according to an Aug. 31 news release.

That leaves publicly traded BrightSphere with just one manager, quantitative specialist Acadian Asset Management LLC, Boston, which managed $117.8 billion as of June 30.

BrightSphere managed a total of $126.9 billion, including Acadian's AUM, as of June 30. Before the divestment of the six managers began, BrightSphere managed $181 billion as of June 30, 2020.

Suren S. Rana, BrightSphere president and CEO, said during a July 29 earnings call that one of the reasons for the change to a single manager was that "we found that (there were) very limited synergies of having multiple different businesses under one roof," according to a transcript. He added that the proceeds from the sale will be used to pay down debt and return capital to shareholders.

Executives from BrightSphere did not respond to a request for comment.

BrightSphere's decision to downsize the number of affiliate managers makes sense "in terms of managing the business and doing what's right for shareholders. If the holding company isn't adding value, it makes sense to sell affiliates," said Boston-based consultant Andrew H. McCollum, head of investment management at Coalition Greenwich, a division of data and analytics company CRSIL Ltd.

When it comes to deal size in the multiaffiliate segment of the investment industry, sources said the July 31, 2020, acquisition of multiaffiliate manager Legg Mason Inc. by Franklin Resources Inc., San Mateo, Calif., could be one of the last big purchases.

The addition of seven Legg Mason firms catapulted Franklin into the trillion-dollar segment of publicly traded managers, raising its AUM to $1.4 trillion from $623 billion at the time of the sale.

Franklin has brought all of the Legg Mason affiliate managers onto the firm's various platforms, said Adam B. Spector, executive vice president and head of global distribution.

As promised by Jennifer M. Johnson, Franklin's president and CEO, when the deal with Legg Mason closed, six of the seven Legg Mason affiliates have remained completely independently managed. The exception was the merger of former Legg Mason quantitative manager QS Investors LLC, New York, with Franklin Templeton Multi-Asset Solutions to form Franklin Templeton Investment Solutions on Oct. 1, 2020.

Ms. Johnson said in a news release that the two solutions-oriented teams would "deliver new growth opportunities" when combined.

Running a multiaffiliate manager comes down to "execution. There needs to be accountability and investment manager independence with scale at the center. Affiliates need to buy into the center services (of the parent company)," Mr. Spector said.

When asked about Franklin's 26 consecutive quarters of total net outflows according to P&I's tracking of the firm's earnings data, Mr. Spector said the firm "turned the flow picture around a year ago" when the firm's attrition rate was 8%. The attrition rate now is about 1%, he said.

Mr. Spector said the continuing total net outflows stem from "challenges with some strategies" that he declined to name.

In the second quarter, Franklin had long-term net inflows of $3.1 billion to alternatives and $2.1 billion to fixed income, but that was offset by $11.5 billion in net outflows for equities and $300 million for multiasset.

Franklin Resources managed $1.55 trillion as of June 30.

Observers predict that there will be more money managers looking to be acquired than multiaffiliate managers willing to buy them going forward.

Whether succession issues are on the table or a money management firm is looking for better operational and technology support, distribution and other services that it can't easily afford on its own, "from an M&A perspective, companies want to be partnered with multimanager managers," said Berkshire's Mr. Stern.

Multiaffiliate managers, on the other hand, are "looking for ways to economize, to be more competitive, to retain their margins, to lower distribution and operating costs. What they are really looking to acquire are minority stakes in alternative investment managers" given red-hot demand from asset owners, Mr. Stern said.

Like many asset owners, Mr. Stern said multiaffiliate firms also want to reduce the number of money managers, especially traditional managers, on their platforms.

"The big impact on traditional managers is that from now on, more multimanager boutiques will be selling more and buying fewer firms," he said. Industry sources agreed that for the most part, the multiaffiliate model of the future likely will have a much smaller group of managers.

The multiaffiliate model of the future is far more likely to be composed of "perhaps between two to four affiliates with a very hands-off owner," Cerulli's Mr. Waldert said.

"It's not likely that the industry will see another Legg Mason, a single owner with 10 to 12 companies in its group," he added.

Arleen Jacobius contributed to this story.