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Dealing with succession in a land of boutiques
(Pictured: Nate Dalton)
The benefits of boutiques are well documented. It’s mainly about size, nimbleness and staff ownership, leading to proven outperformance. But the disadvantages are not so well known. They’re mainly about succession. The problem has always been handling succession without losing the former benefits.
Nate Dalton, president and chief operating officer of Affiliated Managers Group, the US-listed multi-affiliate manager, believes his firm has got it right. There are other multi-affiliate firms, but none as big as AMG which offer continued staff ownership through generational change.
AMG has 30 affiliates totaling US$630 billion in funds under management. It represents nine of them in Australia via its Sydney office, headed by Gregor Rennie, while one of its largest affiliates, AQR, has its own Australian office as well.
In Australia last week on a regular visit Dalton said: “The history of AMG is that we set out to be a solution to a problem, which was the succession problem. We realize, as do others, that there is something special about these businesses. But we never set out to fill style boxes [in the AMG portfolio]. Each affiliate runs its business autonomously.”
AMG typically buys a majority interest in a firm, enters a long-term contract with management and shares in the revenue. Managers can dial up or down the help they get from AMG in marketing or backoffice services. Many, for instance, do their own marketing for institutional investors in their home country and rely on AMG internationally. Increasingly, in the US, they use AMG for retail distribution.
In four of its affiliates AMG took a minority holding and in two of those – AQR last year and Blue Mountain in 2012 – the holdings were subsequently increased.
Dalton describes the business as “simple but not easy”. He says: “It’s a hard business to execute. It’s not for us to substitute our knowledge on investments for theirs or on how they run their businesses.”
AMG sees its role as getting people to understand its affiliates and to make it as easy as possible for who appreciate the boutiques. “They are buyers who are looking for return streams and can differentiate intelligently between managers.”
In the region, AMG also has a small Hong Kong office, which covers Korea as well, but Dalton believes it will be a long time before it has a presence on the Chinese mainland.
“We need the notion of independent boutiques to have taken hold,” he says. “I am more surprised, though, that we don’t yet have an investment in a high quality boutique in Australia.”
AMG some years ago did have extensive discussions with Platinum Asset Management but the majority owner, Kerr Neilson, decided on the IPO route, with considerable success. Australia, too, has produced many successful boutiques, prompting a former head of Russell Investments in the region, Alan Schoenheimer, to call Australia “a land of boutiques”.
The several Australian multi-affiliate firms, such as Treasury Group, Pinnacle and Challenger, act more as incubators for boutique start-ups, investing a lot earlier in their lives than the AMG model allows. Dalton says that it is a very different proposition to back a team and help it grow, as the incubators tend to do.
Rennie said that last year was a solid one for the AMG affiliates represented in Australia. The firm was in discussion with “a couple” more about representation.
