On Monday, September 15, 2008, news hit that the world’s largest insurance company was in danger of becoming the latest victim of an escalating credit crisis that was unraveling the global financial system. American International Group’s outsize exposure to toxic securities had pushed the firm to the brink of collapse. Once considered an impossible scenario, bankruptcy was no longer out of the question for the insurance giant after fabled investment bank Lehman Brothers Holdings filed for Chapter 11 court protection early that morning.
Longtime AIG executive Robert Discolo won’t soon forget that historic day. The Queens, New York, native, who at the time was running a $9 billion hedge fund business for the insurer’s asset management arm, remembers having breakfast with a potential client at a hotel in San Francisco. Given the day’s headlines and the rising panic on Wall Street, Discolo was too distracted to spend much time trying to convince his breakfast guest that AIG Investments — which managed $625 billion for AIG’s own insurance companies, as well as $128 billion for external clients — was on solid ground. It would have been a tough sell even for the down-to-earth, likable Discolo: “I didn’t even know if I would have a job.”
The waitress also had her doubts. When Discolo presented her with his credit card plastered with the AIG logo, she politely apologized and said she did not think she could accept the card. “It was humiliating,” recalls Discolo, 48. “People didn’t know what AIG was before, and now it is a symbol of everything going wrong.”
The credit card snub stung, but more importantly it revealed how cursed the AIG brand had become — and the controversy was just beginning. Public anger exploded a few months later when, after an $85 billion bailout that government officials believe prevented a full-blown financial collapse, the AIG board voted to pay exorbitant bonuses to the members of AIG Financial Products, the division that invested in the risky credit default swaps that would lead to the insurer’s downfall.
Yet the scandal was not enough to send Discolo or other senior members of the investment team scrambling for the exits. Loyalty to the business — and to AIG’s once-vaunted but now badly tarnished legacy — powered their resolve to drive the company forward with a new owner and under a new name, PineBridge Investments, shedding the AIG brand but not the strength of its global footprint and innovative investment strategies.
“People could have just walked away from this, but they struggled through and were loyal to this business they built,” says PineBridge CEO Win Neuger, 60. “We never could have built a stand-alone investment management company without the AIG platform. We had a global presence, private equity, hedge fund strategies and an equity and fixed-income business from day one — no one could have done that from scratch.”
Neuger built a profitable, global and innovative investment business for clients on the back of AIG. His fortunes soared as the insurer prospered in the early to mid-2000s, and plummeted as it fell into the hands of the U.S. government. Neuger and his team have weathered the worst of the financial crisis during the past 18 months and are now hoping to resume their business’ growth trajectory as an independent money manager outside the confines of AIG. But success is far from assured, as the soon-to-be independent PineBridge tries to shake the worst of the AIG legacy while making the best of its pedigree.
AIG Investments’ client business was the brainchild of Neuger, handpicked by AIG’s autocratic yet visionary former chairman and CEO Maurice (Hank) Greenberg in 1995 to build out the asset manager’s external capabilities. Along with Discolo and other senior executives, Neuger transformed AIG Investments into a top-performing money manager that attracted clients from around the world.
The firm’s new moniker is both a nod to the past — AIG’s headquarters are on Pine Street in the heart of the financial district in lower Manhattan — and a vote for the future: Bridge is the internal name given by AIG to the project to sell its money management business. Neuger and the senior management team floated the name PineBridge and it stuck. Staffers liked the idea of a bridge to the future that’s still linked to the past.
PineBridge boasts a strong mix of alternative and traditional investments. AIG had been involved in private equity since the 1960s and in hedge funds since the ’80s, giving PineBridge two of the longest track records in the business. Alternatives, which accounted for the bulk of AIG Investments’ profits, are still lucrative and very much in demand from investors.
PineBridge will soon be offering those products under new ownership. In September 2009, Richard Li of Pacific Century Group agreed to buy the money manager from cash-strapped AIG for $300 million up front and as much as another $200 million in future payments, depending on the firm’s performance during the next six years. Li, the son of Hong Kong’s richest man, is likely to have to pony up the extra money, as the majority of PineBridge’s private equity funds are in the top quartile in terms of performance. Similarly, 81 percent of its listed equity and fixed-income products outperformed their peer groups over the past five years.
Even with its new name and deep-pocketed owner, PineBridge could be in for a rough ride. Volatility has again reared its head in 2010, as governments around the world propose far-reaching regulatory changes to prevent another financial crisis. Nor is PineBridge the only credit crisis survivor trying to carve out a new identity. Neuberger Berman, a money management firm owned by Lehman Brothers that catered to wealthy investors, saw its business grind to a halt when Lehman collapsed in 2008. By May 2009, Neuberger’s management pulled off a buyout of the $158 billion-in-assets company and vowed to start fresh. But the exodus was already well under way. To fund the buyout, the money manager issued $875 million in preferred stock, of which 93 percent is owned by Lehman’s creditors and 7 percent by Neuberger employees.
PineBridge faces similar hurdles. Yet its real challenge going forward may be an internal battle. Discolo and other members of PineBridge’s inner sanctum embody both the pride that comes from running a hugely successful asset management business for a global insurance giant and the crippling shame that arises when the storied institution suddenly finds itself at death’s door. Their success will depend on their ability to retain in PineBridge the strengths of AIG while convincing clients that their firm had nothing to do with its troubled past.
“There was rioting in the street about AIG,” recalls Hans Danielsson, PineBridge’s 55-year-old head of fixed income and listed equities. “But the real question institutional investors will ask is: How strong is this new organization without AIG?”
AIG Investments was born in 1996 and grew up within the protective folds of the world’s largest insurance company. CEO Greenberg, AIG’s patriarch, realized he could build a business to manage funds for external clients right on top of the expensive infrastructure created to maintain AIG’s own assets. He hired Neuger to make it happen.
The Minnesota native, who began his investment career in 1973 as an equity analyst at Northwestern National Bank, a Midwestern icon at the time that is now part of Wells Fargo, was head of global equities at Bankers Trust Co. in New York when the AIG CEO came calling. Greenberg, famous for letting his executives act much like independent business owners, wanted Neuger to start managing the assets of outside clients. Neuger’s biggest challenge: shaking the reputation that insurance companies were far too conservative to manage money well — an ironic concern given AIG’s risky bets made before the recent credit crisis.
In 1996, Neuger and the head of human resources, Connie Miller, started hiring executives. Danielsson, a genteel and constantly smiling Swede who had run international equities at SEB Asset Management in Stockholm, began assembling an equities investment team.
It wasn’t a straight shot. After scads of acquisitions, Greenberg had separate investment teams flung around the world. Neuger combined nine teams and managed to survive the resentment involved in a restructuring, according to colleagues. In addition, though AIG, like any insurance company, was big in fixed income, Neuger put most of his resources into offering high-return, high-fee strategies for clients — a bet he’s still making today.
Formally launched in 2001, AIG Investments started life pitching its services as “investor to investor,” meaning that clients would be investing alongside one of the world’s preeminent insurance companies. In fact, AIG Investments offered unique advantages investors couldn’t get elsewhere: Parent AIG could “warehouse” deals, or buy them with AIG funds, for the private equity group until client money was raised.
Though ultimately in charge of more than $700 billion in assets, Neuger is a quiet leader. His key hires, who are still with him today, included Danielsson and the fast-talking and energetic Miller, who had held HR positions at Wells Fargo and Bank of America and is an extroverted yang to the PineBridge CEO’s naturally shy and professorial yin. In 2005, Neuger brought in Robert Thompson, a founding partner at Ferrer Freeman Thompson & Co., a Greenwich, Connecticut–based private equity firm specializing in health care, to head the alternatives group. Thompson, who tends to speak in bullet points (a product of the five years he spent at consulting firm Bain & Co., he says), also founded GE Capital’s private equity activities throughout the U.S., Europe, Asia and Latin America.
With his team up and running, Neuger moved aggressively to build out the new business. It would not always be smooth sailing. AIG encountered its first storm — minor compared to later troubles at AIG Financial Products — when it was investigated by New York Attorney General Eliot Spitzer in 2005 for the alleged accounting irregularities that eventually pushed Greenberg out. To convince clients that AIG Investments’ portfolio managers would not be distracted by the headlines, Neuger met with small and large clients across the U.S. It worked; the business didn’t lose steam and that year raised $13 billion, a record at the time.
AIG Investments was very profitable. In 2007 client assets generated pretax income of $466 million, up from $300 million just two years earlier. Neuger had grand ambitions: He wanted to generate $1 billion in annual profits by 2010, and he had a detailed plan to get there. The growth, however, came to a crashing halt in 2008 when the government stepped in to bail out the insurer. Federal officials installed a new CEO in September, Edward Liddy from Allstate, pushing out Robert Willumstad, who himself had only recently replaced former CEO Martin Sullivan. By early October, Liddy had announced he would sell AIG Investments, along with other businesses, to raise money to pay back taxpayers.
The decision to sell was a lifeline to shell-shocked staffers. When asked what kept him at AIG, Danielsson, an analytical type more comfortable with calculators than astrology charts, says he was guided by two fortune cookie sayings, which he photocopied and tacked to his wall: “Do your best to make it happen” and “It’s tempting to make promises, but can you fulfill them all?”
“I made a promise to myself and to Win that I would see this through,” he explains. “It may be ugly, it may be terrible, but I will see it through.”
The breakup with AIG was bittersweet for Neuger and his team. Though the insurer had been the backbone for the buildup of their business, the timing of their parent’s troubles gave them a chance to gain their independence. Even before Thanksgiving, UBS investment bankers had produced a pitch book — documents detailing AIG Investments for potential buyers. By January 2009, Neuger had resigned as CIO of parent AIG so he could become CEO of the spin-off.
There were more than 100 potential buyers. By March management had made presentations to about ten of them and received seven bids in April. Some impressive buyers were on the list, including Australia’s Macquarie Group and India’s Religare. In May, Charles Johnson of Franklin Templeton Investors, Crestview Partners and Pacific Century Group formed a consortium to buy the business, but the three firms squabbled over governance issues and couldn’t reach an agreement. Meanwhile, AIG Investments was suffering. Of its original $128 billion in client assets, the group lost $25 billion from market movements, $20 billion that it had subadvised for AIG businesses and $7 billion from client defections, mostly from the hedge fund group. By July 2009, Perella Weinberg Partners had replaced Johnson in the bid group.
A deal seemed imminent. Danielsson, who went hiking in a remote area of Sweden with his son that July, told Neuger he would call to get the good news of the signing of the deal when he returned to civilization. He was disappointed. Again, things had fallen through and Perella Weinberg dropped out of the consortium.
Pacific Century and Crestview powered on. But the two couldn’t agree on which firm would have control, so days before an agreement was to be announced, Li decided to do the deal on his own — an ideal outcome for PineBridge. When the deal closes, which is expected to happen as early as this month, PineBridge will have one owner with a long-term view of the business. Li also has valuable contacts in Asia, including among sovereign wealth funds. Steven Levitt, co-founder of investment banking boutique Park Sutton Advisors in New York, says that the business sold at seven or eight times EBITDA, in line with other recent large divestitures such as Bank of America’s sale of its asset management arm Columbia Management and Morgan Stanley’s sale of Van Kampen Investments to Invesco.
PineBridge is a unique business with a rare mix of global investments. The firm has $87.3 billion in assets, including $22.8 billion in listed equities, $27.3 billion in alternatives, $29.7 billion in fixed income and $7.6 billion in balanced funds. About 24 percent of assets are retail, 45 percent institutional and 32 percent those of AIG and its insurance affiliates.
“They were able to build all these businesses on the footprint of the parent company,” says John Casey, chairman of Darien, Connecticut–based consulting firm Casey, Quirk & Associates. “PineBridge is the beneficiary of decades of investment from AIG. Even with unlimited capital you couldn’t recreate this in a reasonable time frame.”
Performance has been very solid. PineBridge’s strategic bond fund, one of the firm’s largest fixed-income offerings, returned 29.1 percent in 2009, trouncing the Barclays Capital U.S. aggregate bond index’s return of 5.93 percent. The fund had a 6.15 percent annualized return during the past five years, easily besting the 4.97 percent return of the benchmark. PineBridge is also strong outside the U.S., especially in Asia. Its Japan small-cap equity strategy, for example, delivered a 17.07 percent return in 2009, more than three times the 5.09 percent return of its benchmark, the MSCI Japan small-cap DTR net index. During the past five years, Japan small-cap equity lost 1.19 percent annually, while its benchmark lost 3.16 percent.
Though private equity has been under pressure since the beginning of the financial crisis, investors are still committed to the private markets, and PineBridge has a diverse array of offerings. The firm has historically stayed away from the large, multibillion-dollar leveraged-buyout funds — now the most troubled part of the private equity industry — and instead focuses on niche areas, such as mezzanine financing, infrastructure and health care, and invests in less crowded geographies, including central and eastern Europe and Brazil. “We are benefiting from our niche orientation,” Thompson says.
Discolo’s hedge fund business is looking up, too. Although, like many of its competitors, it has lost more than half its assets since late 2008 as investors sold off their more-liquid alternative investments, PineBridge still manages a respectable $4.1 billion in funds of hedge funds. Those funds are invested with roughly 100 hedge fund managers and have an impressive composite return of 10.46 percent annually since 1988, compared with a 9.55 percent return for the more volatile S&P 500 index during the same period. Discolo is upbeat about the prospects for the seeding operation the group launched in a joint venture with New York–based Larch Lane Advisors in early 2008. He says the firm has a great opportunity as other start-up capital has dried up and as Wall Street proprietary trading desks have shut down. With seeding, PineBridge owns a slice of managers’ future revenues, which then get rebated back to clients. “If you can’t beat ’em, join ’em,” he says.
PineBridge’s biggest claim to fame may be its global footprint. The firm plans to exploit that advantage as investors increasingly allocate more assets to emerging markets. Danielsson says the firm has decided to keep investment personnel in 31 countries, an expensive proposition but one that he believes will help differentiate PineBridge from its North American competitors.
Danielsson is also quick to promote the investment philosophy he developed early on as a key way to gain assets: The firm concentrates on strategies only where it believes that it can truly add alpha. In some equity strategies, for example, the managers invest in their highest conviction ideas, which can translate into focused portfolios with as few as 20 stocks. Danielsson also stresses that PineBridge wants to preserve its multiasset class capability so it can continue to advise investors on overall asset allocation and other investment issues: “It’s a talent that came out of the nature of running the entire portfolio for a giant insurance company.”
Of course, PineBridge now manages only a tiny fraction of AIG’s once–$625 billion portfolio. “The opportunity is the fact that we are a much larger investment management organization in disguise,” Danielsson says. “We are a $200 billion to $300 billion company with only $90 billion to manage. We’re in a suit that is too big.”
Danielsson admits that although PineBridge is profitable, margins aren’t where they should be because most of its products and strategies have too little money in them. But both he and Neuger see that as a positive because if PineBridge can get back on a growth trajectory, it can expand quickly without adding to expenses.
PineBridge has aggressive growth plans. Sources say the firm plans to launch new private equity funds this year, including a vehicle that would buy limited-partnership stakes in existing private equity funds on the secondary market. PineBridge is also looking to raise money in its focused funds and is putting resources into its research-enhanced, or index-plus, strategies, which it hopes will be popular among institutional investors clamoring for investments with controlled risks and returns. “We are very ambitious here because the mandates awarded are very big,” says Danielsson.
The firm also wants to expand its fixed-income business into emerging markets, where it has capabilities in U.S. dollar and local currencies, governments and corporates. Neuger is particularly optimistic about the retail business in Asia. PineBridge has mutual fund ventures in India, Taiwan and China, a holdover from its AIG days, and retail investors there sent it more than $1 billion in new assets last year. Although Neuger and Danielsson believe it is too late to enter the hypercompetitive U.S. retail market, they will push for PineBridge to become a big player in Europe — and an even bigger one in Asia.
“You have competitors on the ground in Asia, no doubt,” says Neuger. “But the industry dynamics are so exciting in the region with the growth in savings and the growth in economies.”
It’s the kind of excitement and attention that Neuger, Discolo and the team welcome — and will try to stay focused on — as they continue to battle AIG’s ghosts going forward. If an incident early last year is any indication, their resolve and loyalty can hardly be questioned. In March 2009, in the midst of the public outcry over compensation being paid to AIG’s beleaguered execs, staff safety became a main concern. The corporate office issued new security badges granting access to the building, this time without the corporate logo, and warned staff not to wear hats or jackets emblazoned with the AIG symbol. The ever-proud Discolo rebelled, arriving at work one day covered with every AIG freebie he could find.
Still, Discolo and other PineBridge staffers have an air of the battle-scarred. Neuger, however, says even those scars can be leveraged for future success. “We have a tremendous group of people who really have sacrificed a lot in the last two years to stick through this,” he explains. “I really believe that we can come out the other side back on our growth trajectory.”
