Don’t mess with Sean Healey. William D’Alonzo, now chief executive of money manager Friess Associates, remembers inviting the Affiliated Managers Group CEO and AMG founder William Nutt in 2001 to join him and an associate elk hunting at Ted Turner’s Vermejo Park Ranch in New Mexico a few weeks after AMG had purchased a stake in his firm. D’Alonzo, an experienced hunter of elk, turkeys and pronghorn antelope, says Healey was up for the four-day trip. The challenge was that Healey, a varsity wrestler during his undergraduate years at Harvard College and later editor of the Harvard Law Review, had never fired a rifle before. But that didn’t stop him. A Marine Corps brat whose father was stationed overseas for long stretches in places like Vietnam and Okinawa, Healey was used to working hard. He got his elk — on the fifth shot, Nutt points out — and the challenge gave him a taste for more. He has gone on to master hunting, tracking down everything from moose and brown bear in Alaska to Cape buffalo in Africa.
Healey’s competitive fire is hard to beat. Whether hunting prey in Tanzania or making sure he captures the best-performing money managers for AMG, Healey doesn’t stop until he wins. Since the financial crisis bottomed out in early 2009, the onetime Goldman, Sachs & Co. investment banker has been on a buying spree, taking advantage of the market dislocation and his company’s cash-rich position to do six deals with money managers, including a strategic partnership with Value Partners, the biggest hedge fund manager in Asia. During the past two years, Healey — who took the CEO reins on January 1, 2005, from Nutt — has overseen AMG during its busiest M&A period ever, adding $70 billion in assets, putting $1.4 billion to work and turning the company into a formidable international and alternatives manager. (Those two businesses now represent more than 70 percent of earnings.)
“Sean is very competitive, and he gets what he wants,” says D’Alonzo, whose firm manages the well-regarded Brandywine mutual funds and was founded in the mid-1970s by legendary growth investor Foster Friess.
Healey and Nutt have mastered the art of performance. Since the mid-1990s they have unlocked the age-old asset management conundrum of how to find talented investors, determine what makes them tick and create a financial structure in which they have the incentives to continue to outperform and care deeply about the future growth of their firms. The AMG model weaves the entrepreneurial spirit found in independent boutiques with the benefits that a large organization can provide when it comes to distribution, funding and operations.
“If money managers can’t produce good long-term returns, they’re going to die, period,” says Steven Levitt, whose investment banking boutique, Park Sutton Advisors, specializes in asset management. “Talented managers can’t thrive in a bureaucracy. AMG has figured out how to knit them together, while keeping intact what attracted them to a great investor in the first place.”
Nutt, who was formerly president and chief operating officer of Boston Co. and CEO of its subsidiary Boston Safe Deposit & Trust Co., founded AMG in 1993 with backing from private equity firm TA Associates. It has grown from a handful of employees and about $18 billion in assets under management in October 1996 to $320 billion in assets and 110 people today. In 1997 the company went public at $15.67 a share on a postsplit basis; in late March the stock was trading at $105.
AMG owns stakes in 27 money managers, spanning U.S. and international equity and some of the best-known alternative-investment shops, including AQR Capital Management, co-founded by Clifford Asness, who built Goldman Sachs Asset Management’s quantitative hedge fund business. AMG’s stable of affiliates includes Harding Loevner, a highly regarded global and non-U.S. equity manager, founded by former managers for the Rockefeller family; Third Avenue Management, whose founder, Martin Whitman, is a famed value investor; Genesis Asset Managers, a well-respected emerging-markets investor; and ValueAct Capital, founded by three managers, including Jeffrey Ubben, an activist investor. AMG seeks out only active managers. In the fourth quarter of 2010, its earnings per share grew 49 percent and assets under management grew 54 percent compared with the year-earlier period, even as investors in general continued to pour money into low-margin bond funds, of which AMG has almost none.
The company isn’t immune to large swings in the market. During the financial crisis its stock dropped into the high teens and Healey — along with chief operating officer Nathaniel Dalton, a former M&A lawyer, and Darrell Crate, AMG’s CFO, who is retiring next month after 13 years with the company to join a private equity firm — was constantly on the defensive as investors questioned AMG’s strategy.
As markets stabilized in early 2009, Healey and his team were resurgent. They were ready to do deals and entered the market with checkbook in hand just as other buyers, like capital-starved banks and insurance companies, were exiting and selling off money management properties. AMG completed more deals than at any point in its history. In 2010 alone it sealed four transactions, some in the pipeline since before the market crash, with high-profile managers including Pantheon, one of the world’s largest private equity fund of funds; Artemis Investment Management, a chiefly U.K. equity manager in Edinburgh; and Trilogy Global Advisors, a New York–based institutional global growth manager.
From the start, AMG eschewed the idea of buying 100 percent of an investment firm. AMG wanted a piece of great firms, but it needed managers to keep on doing exactly what they had been doing, not cash out. Instead, it chose to buy mostly majority stakes of companies to make sure that founders stayed hungry enough to continue generating top returns. It’s a strategy that’s key in an industry that lives and dies by returns and in which disappointed investors often turn to low-margin index funds. The asset management business has been riddled with the detritus of failed mergers, spin-offs and start-ups for 20 years, and great money managers and institutional investors have lost out every time as performance has fizzled. It may have taken a group primarily from outside the asset management business to create a viable model that keeps talented portfolio managers generating outsize returns.
“Asset management is different from most businesses. It’s about people, not machines,” says the 49-year-old Healey. “We represent the ideal approach of keeping alpha-generating boutiques alive and independent while also offering the benefits of a large global firm behind them,” he adds from his office in a mansion overlooking the pristine wooded campus of AMG’s headquarters in Prides Crossing, Massachusetts. The mansion, complete with a widow’s walk, is the former estate of arch-conservative William Loeb III, the late publisher of the Manchester Union Leader.
“I knew what happened after managers were bought: Their interest went away,” Nutt explains. “So I said, ‘How do you retain the incentives — the spark — that created this great asset management business in the first place? And how do you pass that on to the next generation?’ The enduring AMG business model is to buy only a portion of equity, leaving a material part with the management team.”
George Wilbanks, an asset management partner at Russell Reynolds Associates in New York who has worked closely with many affiliate model firms over the years, says that at some of AMG’s competitors there is little communication between the investment firms and headquarters and often griping. “AMG has enormous credibility with its affiliates,” he says, adding that he directly witnessed this credibility come about, the result of Nutt’s charisma and personal connection with people as well as his willingness to roll up his sleeves and do hard work. This engendered goodwill among the affiliates. “Affiliates don’t complain about AMG as they feel it always has something concrete to offer,” Wilbanks says.
Large money managers — think BlackRock, Fidelity Investments and Vanguard Group — have come to dominate asset management during the past decade. The business has some of the best margins of any industry, and firms quickly realized that it was even more lucrative to spread the costs of research, technology and service across a larger asset base. But the gunslingers of asset management — that was Institutional Investor ’s description of John Hartwell, whose firm was AMG’s first investment, in 1994 — don’t always come out of the larger firms. Christopher Vella, head of research for the multimanager group at Northern Trust Corp., which has $4 billion of its program in boutiques, including AMG affiliates, explains it like this: “There’s a big performance benefit in a lack of bureaucracy at the boutiques, as well as a nimble investment process. Smaller and midsize managers do better in down market environments and are less indexlike.” Vella says smaller managers outperform by 150 to 200 basis points after fees, compared with the Russell 3000 stock index.
The AMG model is not for everyone. For starters, the company takes a percentage of affiliates’ revenue — typically about 30 percent — rather than their profits. During boom times, if revenue jumps by, say, 20 percent, both the affiliated manager and AMG enjoy the growth. But during tough times — when revenue may be down slightly but profits tumble — the manager shoulders most of the pain. In addition, the AMG model creates a high hurdle for innovation. If an affiliate launches a new product, it has to eat the cost of research and development, while AMG continues to take its share of revenue.
As AMG has gotten larger, its affiliates have also grown in size. Between 1994 and 1998, an AMG affiliate averaged about $3 billion in assets. That average is now about $12 billion. Although AMG misses out on the initial explosive growth from some managers, it also misses early disasters.
Healey and Dalton, who will take on the role of president in addition to COO after AMG’s annual meeting in May, along with Jay Horgen, who will become CFO when Crate retires and also runs new investments, aren’t resting on their laurels. They have been building an international distribution platform, stationing salespeople who can represent multiple affiliates across the globe. The distribution effort has reached critical mass and shown good results, Dalton says, but it is still in the early stages. Performance fees from alternative investments are also starting to be a meaningful part of profits.
What’s more, the 16 years that Healey and other members of the AMG team have spent on the road courting money managers is paying dividends, especially in the U.S. Now calls are inbound, and when AMG doesn’t get a deal, it’s often because it won’t pay what it sees as an inflated price or because the managers aren’t a good cultural fit with the firm.
Big competitors such as Legg Mason and Nuveen Investments have continued to look at firms as well, but each is dealing with its own problems. Nuveen is saddled with debt, as it was taken private at the height of the market by Madison Dearborn Partners, and Legg Mason is still dealing with some fallout from investor outflows after poor performance during the financial crisis. Other competitors with similar multiboutique asset management models include Asset Management Finance, BNY Mellon Asset Management, Natixis Global Asset Management and Northern Lights Capital Group.
“Other managers are trying to structure deals like AMG, leaving meaningful equity at the affiliates,” says Michael Kim, an asset management analyst at New York–based brokerage Sandler O’Neill + Partners. “You take a revenue share and let underlying affiliates control their own P&L.” AMG founder Nutt agrees, but he believes competitors have little chance to chip away at his firm’s dominance: “When you can have the real Coca-Cola, why take some imposter?”
Bill Nutt Wasn’t the first to try to combine the performance edge of investment boutiques with the operational advantages of a large asset management organization. In 1980, Norton Reamer, former CEO of Putnam Investments in Boston, got the entrepreneurial itch and started United Asset Management Corp. His idea was to buy up small independent institutional asset management shops, unlock their value and increase their efficiency by putting them under one roof. It took Reamer three years to persuade the first manager to sell: Denver-based Nelson, Benson & Zellmer. By 1986, UAM had done several deals and assembled enough assets under management, $13 billion, to do an initial public offering.
By then, big banks and brokerage firms were also getting into the asset management business. In 1983, two years after Shearson Lehman Brothers bought Boston Co., Sanford Weill, then president, and Jeffrey Lane, COO at the time, asked Nutt to build a mutual fund business. A corporate securities lawyer at Ballard Spahr in Philadelphia, Nutt had created the first institutional money market fund. Asset management would go on to become the largest of Boston Co.’s fee-based businesses. Nutt was also tasked with dismantling a failed collection of 16 investment counseling firms that Boston Co. had previously assembled.
At the same time, Healey was building his credentials. After finishing high school in San Diego, he went on to Harvard College, where he graduated in 1983 with a degree in American history and literature. He then earned a Rotary scholarship to the University College Dublin in Ireland, where he obtained a master’s degree in philosophy and met his wife, Kerry, a Florida native who had also attended Harvard. (She doesn’t remember meeting him there, however.) After returning to the U.S., Healey entered Harvard Law School, believing he would one day be a law professor.
Healey never ended up practicing law. While at Harvard he met a Goldman Sachs M&A banker with a similar law background and landed a summer job at the firm. In 1987, following his graduation from Harvard, he joined Goldman as an associate in M&A.
“From day one at Harvard, Sean exhibited a cool confidence where he was never fazed, never anxious,” says John Copeland, an executive director in private wealth management at Morgan Stanley, who attended law school with Healey. “With Goldman, it was the first time the firm had ever hired a law student as a summer intern.”
In the fall of 1992, Shearson needed to raise capital and decided to sell off Boston Co. By this time, Nutt was CEO and chairman of all the operating businesses. Mellon Bank bought the firm, and Nutt, who already had come up with the idea for AMG, didn’t want to stick around working for a Pittsburgh bank. In the summer of 1993, he talked to his friend Kendrick Wilson III, a banker at Lazard Frères & Co., who referred him to C. Kevin Landry at TA Associates, the only private equity firm at the time that had invested in asset management.
After presenting an 11-page business plan to TA that fall, Nutt got $25 million in backing and, also using some of his own capital, formed AMG. In December 1994 he made his first investment: J.M. Hartwell, a New York–based growth investor founded in 1961 whose clients include large foundations and wealthy individuals.
For the first couple of years, AMG was just Nutt and his secretary. In 1995, Nutt was looking to expand and at the suggestion of TA partner Andy McLane, he contacted Healey, then a managing director in Goldman’s prestigious financial institutions group, focusing on asset management. AMG had already closed its first transaction and had enough of a track record to lure Healey, who joined in March 1995. That same year, Nutt raised a second round of capital from TA, ITT Hartford and NationsBank (now Bank of America Corp.)
Other staffers quickly followed. Dalton — who had met Healey when they worked on the reverse merger of Pacific Investment Management Co. and four other investment managers owned by then-parent Pacific Mutual Life Insurance Co. and Thomson Advisory Group — came on board in 1996. Although the two men interact with the ease of people who have spent decades working together, Dalton’s slightly rumpled demeanor is in stark contrast to Healey’s well-groomed and careful appearance.
In 1997, AMG acquired a stake in Tweedy, Browne Co., which gave the company the critical mass it needed to go public. Tweedy Browne’s value approach harks back to the late Benjamin Graham, co-author of the investment classic Security Analysis. William Browne, one of four managing directors at the firm, says the partners at Tweedy were evaluating a number of options at the time, but determined AMG was a good fit: “We wanted to run our business ourselves, didn’t want to sell to a bank and be flushed through its distribution systems, and we wanted cash for part of the business.”
AMG hired Crate, who was a managing director in the financial institutions group at then–Chase Manhattan Corp., right after the firm went public. In 2007, Healey hired Horgen, whom he had originally gotten to know in 1993 when the former Yale University baseball pitcher joined the FIG M&A team at Goldman. Horgen went on to become a star banker at the firm; AMG was one of his clients. Horgen later joined Merrill Lynch & Co. under Gregory Fleming, now president of global wealth management at Morgan Stanley.
AMG started racking up deals after going public. Nutt and Healey bought majority stakes in Norwalk, Connecticut–based Managers Investment Group (then called the Managers Funds) in 1999; in Boston’s Frontier Capital Management Co., a growth and relative-value equity manager, in 2000; and in Friess Associates in 2001.
Friess represents the ideal AMG target: an investment firm with a great long-term track record and founders who want an exit strategy but still have plenty of time left to continue to grow their companies. Foster Friess, after talking to scores of money managers, banks and insurance companies that wanted to do a deal with him, signed an agreement with AMG in July 2001, impressed by its hands-off approach with its affiliates. Friess managed about $6.9 billion, but by the time the deal closed three months later, its assets had shrunk to $6.1 billion, in part because of the drop in stocks post-9/11.
“We tested their hands-off philosophy right out of the gate,” says D’Alonzo, who became CEO in 2002 when Friess retired. “But they understood our investment philosophy and were supportive.”
At the same time that AMG was thriving, rival UAM was struggling. Its model of buying 100 percent of money managers started to unravel in the late 1990s as performance fizzled, and the company was ultimately sold to London-based Old Mutual in 2000. Healey and Nutt saw the folly in UAM’s approach of fully cashing out managers in a business whose most valuable asset is people; that’s why at AMG they insist that affiliates maintain stakes in their own firms.
Nutt and Healey learned early on that the relationships they formed with managers — before and after a deal — would be a big part of their success. They struck out on the road, visiting managers and familiarizing themselves with their styles and investment disciplines. They built a database using public and proprietary information and screened for managers they should get to know. Even if a deal was far in the future, the principals made it their business to learn about the managers.
In 2005, Healey became president and CEO. Nutt, who turned 59 that year, felt that if AMG was going to advise affiliates on their succession planning, he needed to mimic the same philosophy at the firm.
The previous year, AMG made its first minority investment, buying a 20 percent stake in hedge fund firm AQR, which had been founded in 1988. David Kabiller, head of client strategies at AQR, says that he and his three fellow co-founders, including Asness, had financed the entire firm themselves and wanted to diversify.
“We were a young business with a lot of ambition to innovate,” he notes. “We had financed 100 percent of our business, so we wanted to diversify a small amount of our personal holdings. We had heard that AMG knows how to execute asset management transactions without disrupting the businesses.”
The AQR investment was Healey’s first big deal as Nutt stepped back from the operation. “Sean has a unique ability to see what money managers need in terms of independence, autonomy,” Kabiller says. “He understands the balance between the need for control and the need to give latitude.”
In the mid-2000s, Healey and his team saw that investors were changing their portfolios in significant ways, adding hedge funds and private equity and looking for growth outside the U.S. In 2005, AMG invested in two Canadian boutiques. In 2007 it expanded further into alternatives with a minority investment in BlueMountain Capital Management, a New York–based hedge fund firm specializing in relative-value credit strategies. That same year, Healey tapped Horgen, now 40, to run new investments.
Healey’s tenure has been anything but a straight shot. In August 2007, AQR’s quantitative style of investing — using computers to find anomalies in the markets — briefly stopped working, sending tremors through AMG. Beginning that month certain quant strategies that historically had posted steady returns started failing for no apparent reason. It turns out that many quants were using similar approaches and mathematical algorithms to trade many of the same stocks. As a result, the decision by one large manager to sell to cover margin calls stemming from the broadening subprime crisis began a downward cascade, driving down prices on these same stocks and triggering more sell orders at the quant shops.
Between late July and early August 2007, AQR’s quantitative strategies lost 13 percent. Rumors flew through the market that investors were requesting redemptions, and AMG was hit along with its affiliate. AMG cut its full-year earnings outlook because of the turmoil. But AQR bounced back by the end of the month, and Healey remained committed to alternatives.
The quant crisis turned out to be the canary in the coal mine for the financial meltdown to come. By December 2008 investors had walloped the shares of AMG, whose strategy of investing in equity and alternatives was hit hard. In the fourth quarter of 2008, AMG had $223.4 million in revenue, a 42 percent decline from the same period in 2007. Investors pulled $3.3 billion in assets from AMG’s affiliates, which had almost no fixed-income or index products to balance outflows. The company’s stock price fell almost 70 percent between September 15, when Lehman Brothers Holdings filed for bankruptcy, and December 2, 2008. Analysts worried that AMG would have to restructure revenue-sharing agreements to leave more cash with the affiliates.
In the summer of 2009, healey took home top honors, as well as a nearly $1 million cash prize, in the White Marlin Open in Ocean City, Maryland — his first time competing in the world’s largest billfish tournament. To win, he wrestled a 93.5-pound white marlin for an hour before bringing the animal on board his boat, which by then had lost the transmission for one of its engines.
Healey’s Hemingway moment didn’t stop the slide in AMG’s stock price, which fell from nearly $100 a share in September 2008 to a low of $19 in November 2008. But despite investors’ fears, AMG’s financials were actually in pretty good shape, thanks to its revenue-sharing model.
Some investors were also concerned during the crisis about the company’s leverage because it has $730 million in long-dated junior convertible trust preferred securities on its balance sheet. Though classified as debt, this junior capital is a 28-year obligation of the business and ultimately converts into equity.
AMG had cash, $375 million, as well as a credit facility of $770 million that it could tap, and as the market stabilized in 2009 it leapt into action, one of the few buyers in the market. AMG entered China through a strategic partnership with Value Partners and made an investment in New Jersey–based Harding Loevner. The next year it made four new investments, buying stakes in Artemis; Pantheon; Trilogy; and Aston Investment Management, a Chicago-based firm that had unapologetically copied AMG’s model but had done only one transaction. The purchase of Pantheon, at $775 million, was AMG’s largest deal ever. “M&A is my favorite thing, but the sleep deprivation involved in that many deals put me in a bad mood from November 2009 to March 2010,” jokes Horgen.
AMG is becoming the go-to firm for midsize investment managers. For one thing, there’s no competition. Legg Mason and Nuveen, for example, have not made any significant recent investments. Some firms, such as Northern Lights Capital, are active, but they go after smaller players and don’t compete directly. Boutiques can also seek liquidity from larger private equity shops or can choose to become public companies, but these options aren’t always appealing to founders or the firms’ clients.
Mark Tyndall, co-founder and CEO of Artemis, says his firm nixed both private equity and a public offering because it had already gone through several corporate reorganizations. Artemis had been an autonomous manager of ABN Amro, then became part of Fortis in 2007 when the consortium of Fortis, Royal Bank of Scotland Group and Banco Santander took over ABN Amro. “If it was at all possible, we were going to sell ourselves to somebody that wouldn’t force us to sell again or go public,” Tyndall says. “There are very few ways to achieve that.”
Distribution will be critical to AMG’s success. The company is providing increased distribution to its affiliates because of its growing reputation as a house that attracts and retains the best performers. That brand has resulted in significant cross-selling. Healey says he recently ran into a client in Australia who had hired one of AMG’s affiliates as a subadviser in part because it had AMG’s endorsement.
Dalton is also continuing to build out distribution directly through a formal platform that he launched in 2007. It is now gaining enough critical mass — affiliates can opt in for distribution — that the company has been able to pour more resources into it. AMG has an ulterior motive in providing distribution: It keeps managers focused on performance.
“If a boutique built a global infrastructure to access and service clients, that would change the nature of the firm,” says Dalton.
AMG now has offices in Australia, Canada, Hong Kong and London. Though Dalton declines to say how much distribution the platform has brought in, he notes that almost every affiliate uses the system, a fact that has a lot to do with the complicated nature of selling funds overseas.
AMG offers its affiliates compliance and back-office best practices and access to top lawyers. The company can spread any savings — say, advice on the Dodd-Frank Wall Street Reform and Consumer Protection Act — across its affiliates.
Passive investments and exchange-traded funds won’t figure in AMG’s future. Healey says no to ETFs, even though the vehicles have been the fastest-growing asset management product of the past few years, because they are still largely index products and he doesn’t think that AMG can add value there. Healey’s view of indexing is in line with his passionate belief that boutiques are better able to produce alpha — returns above a benchmark — than are large integrated firms.
AMG wants to increase its presence among U.S. and European retail investors. Although investors are not going to find AMG advertising during the Super Bowl any time soon, Healey, Dalton and Horgen are intent on increasing the awareness of the brand. In the early years they were careful to stand somewhat silently behind affiliates with much bigger names. But the experience of existing clients choosing to hire other AMG affiliates clearly indicates that the brand is valuable. AMG is also well positioned in a product set — global and emerging markets and alternatives — that is quite different from its public and private asset management peers. Healey and company want that message out there.
In the aftermath of the crisis, more boutiques want strong partners. The flip side is that the business of asset management is now much more transparent. AMG has a great window into how asset managers weathered the crisis, and their decision making and performance during the worst markets in 100 years. “We’re a global-scale partner that brings certainty about business stability, financial controls, compliance controls and the efficiency of having distribution representatives in their same time zones,” says Healey.
Regardless of the creativity of the structure of its deals, its distribution muscle or its ability to stand back and let its affiliates do their thing, AMG’s successful model comes down to relationships. Healey pulls out a glass container with a piece of the transatlantic cable that first connected Europe and America. It was a gift from Artemis co-founder Mark Tyndall when his firm’s deal with AMG closed in March 2010. But Tyndall had a confession to make when he handed over the trinket: He had bought the gift, neatly symbolizing both organizations’ cross-border ambitions, in 2008, when the firms first started talking. Healey put the discussion on ice when the financial crisis hit.
“I’m very proud of that deal,” Healey says. “We were able to preserve that relationship beyond emotions and through the rough-and-tumble of the credit crisis.”
