After George Walker IV left a 14-year career at Goldman, Sachs & Co. in 2006 for Lehman Brothers Holdings, he found himself at groundzero of the financial crisis. Walker, who had been hired to run Lehman’s global investment management business, which included value-focused money manager Neuberger Berman, was swept into the firm’s mid-September 2008 bankruptcy — the largest in U.S. history — trapped in meetings with bankruptcy attorneys, the restructuring firm, creditors’ committees and Lehman’s corporate deal-making team while struggling to disentangle his business from the investment bank without killing it.
Walker’s asset management division, which oversaw equity, bond and alternative investments for outside clients, had nothing to do with Lehman’s unraveling. But that didn’t matter. Though many referred to Lehman’s asset management unit as a crown jewel, public pension clients, including the New York City Retirement Systems, were walking out for fear that any association with Lehman would provide unending bad publicity.
Walker, however, believed he could find a buyer — and fast. Creditors, eager to extract cash, approved his plan. But pressure was intense. Financing threatened to freeze entirely. And without a deal Walker risked an exodus of clients and employees and the rapid erosion of the business’s value.
Walker and Neuberger were lucky. Through the summer of 2008, Lehman had shopped the group in an attempt to raise capital. During that period of relative calm, potential buyers, including some private equity shops, had performed due diligence.
As a result, Walker and his senior management team, including Joseph Amato, now Neuberger Berman’s chief investment officer; Andrew Komaroff, chief operating officer; and Heather Zuckerman, chief administrative officer, were able to negotiate an agreement for private equity firms Bain Capital and Hellman & Friedman to buy Neuberger Berman and fixed income and alternative investments from the Lehman estate for $2.15 billion. The agreement was signed on September 29, two weeks after the bankruptcy filing. The entire operation assumed the Neuberger Berman name.
“No [money management] firm was hit harder, but in the end no firm exhibited greater stability,” says Walker, now CEO of Neuberger Berman, at the firm’s New York City headquarters, a few blocks from Grand Central Terminal.
But the deal to take Neuberger private had one more plot turn. Before the buyout could close, equity markets continued to melt down, triggering contract provisions that lowered the price. That provision allowed Neuberger management to assemble its own bid. Under the final $922 million deal announced December 20, 2008, the Lehman estate retained a 49 percent stake, betting the firm’s value would rise, and Neuberger employees acquired 51 percent.
Today, Neuberger Berman is independent, with close to 20 percent of its employees owning about 80 percent of the equity. But for all the heroics required to free the firm from Lehman’s ruins, Neuberger Berman finds itself, structurally at least, a midsize private asset manager in a business dominated by behemoths public and private, such as BlackRock, with $4.3 trillion in assets, or J.P. Morgan Asset Management, Fidelity Investments and Vanguard Group, each with over a trillion dollars in assets under management. Walker is betting that the firm is large enough to be meaningful in the markets and able to support research and sales teams but small and agile enough to deliver exceptional returns. “If anything, the bigger we get, the harder it will be to deliver alpha,” he says.
“It’s unbelievable that an organization that went through that kind of stress could survive with virtually no turnover or damage to its performance,” says Douglas Kramer, CEO of New York–based money manager Horizon Kinetics, a onetime Goldman partner and a former classmate of Walker’s at the University of Pennsylvania. “It took a certain person to get this organization out of Lehman Brothers intact. Being private is definitely a distinguishing factor. There’s room to grow, but they also have the ability to offer specialty products that can deliver alpha. How do you do that when you’re a megasize firm?”
Walker, 44, grew up in a wealthy St. Louis family. His great-grandfather George Herbert Walker started G.H. Walker & Co., a financial firm that later became part of Merrill Lynch & Co., and went on to run W.A. Harriman & Co., which became Brown Brothers Harriman & Co. His son-in-law, Prescott Bush, worked at Brown Brothers, was elected a senator from Connecticut and had a son, George H.W. Bush, and a grandson, George W. Bush, who both became president of the U.S. (The latter is Walker’s second cousin.) Walker’s father later moved back to St. Louis to become CEO at brokerage Stifel Nicolaus. Walker himself went to the University of Pennsylvania’s Wharton School and joined Goldman. In 1994 he helped Goldman expand investment banking in Germany, then moved to a team building out Goldman Sachs Asset Management; he made partner in 1998.
In early 2001 he was charged with turning around Goldman’s hedge fund strategies group, the former Commodities Corp., which Goldman had bought in 1997 after the firm launched the careers of traders like Bruce Kovner and Paul Tudor Jones II. Egerton Capital CEO Jeff Blumberg, who worked with Walker at Goldman, says Walker’s talent was for coming into tense situations with people suspicious of the new boss and defusing them. Walker, Blumberg says, used that same skill to rebuild Neuberger: “He’ll instill his own beliefs, but he respects the culture of the firm.”
Walker says he took the Lehman job because he wrongly thought his two bosses at Goldman, Peter Kraus and Eric Schwartz, would stay for 20 years. In fact, neither remained: Kraus now runs AllianceBernstein, and Schwartz is a private investor. Walker admits he had to tone down his management style when he came to Neuberger, where portfolio managers like value guru Marvin Schwartz had been successfully investing for decades. Today, Walker’s colleagues praise him for delegating, giving staff autonomy, a framework in which to work and necessary resources.
The firm he presides over has certainly experienced changes of its own. Neuberger Berman was co-founded in 1939 by Roy Neuberger, an art collector who made a name for himself shorting Radio Corp. of America in 1929 (he died in 2010 at age 107), and two partners, Robert Berman and Howard Lipman. The firm launched one of the first no-load mutual funds in 1950 — the Guardian Fund — and became known for value investing and managing assets of wealthy individuals. Roy Neuberger built the firm around investment teams; in the 1990s the firm diversified into other strategies. After 60 years of private ownership, Neuberger Berman went public in 1999 just as the technology bubble was peaking, making many of its managers wealthy.
Four years later Neuberger managers got another big payday when Lehman acquired the firm for $2.6 billion, part of a then-popular strategy of financial firms gathering assets to dampen earnings volatility. Lehman hoped to expand Neuberger beyond equities and use its global reach to sell products to clients around the world. Although asset management remained a small part of the investment bank’s earnings, the plan saw some success, although Lehman never truly globalized the business. Neuberger did tap Lehman’s deep pockets and expertise in areas like private equity; Lehman used Neuberger products, such as money market funds, in prime brokerage and investment banking and referred clients to the high-net-worth advisory unit.
The same year Lehman bought Neuberger, the investment bank acquired the fixed-income business of Lincoln Capital Management in Chicago and Crossroads Group, a private equity fund-of-funds manager in Dallas. Lehman grew assets under management to $279 billion, at a compounded annual rate of 22 percent, between November 30, 2003, and June 30, 2008. It increased revenue at a rate of 27 percent for that period.
Today, $242 billion-in-assets Neuberger Berman is thriving, with products that include traditional long-only fixed income and equities and alternatives for institutional and retail investors. When Neuberger was under Lehman, the top ten consultants endorsed 52 investment strategies; today they favor 109. The firm has signed clients such as the $26.9 billion Texas Permanent School Fund, which awarded Neuberger a $900 million private equity mandate that includes co-investments and secondaries.
And the firm does execute. Of its traditional equity and fixed-income strategies, 88 percent have outperformed their benchmarks gross of fees for the ten years ended September 30, 2013. Eighty-one percent of invested capital in its private equity funds raised from 2000 to 2010 outperformed the benchmark (the MSCI World Index plus 500 basis points).
Neuberger boasts a product mix that both hedge funds and traditional money managers are now chasing. Though the journey out of Lehman was hair-raising, the investment bank created a compelling mix of value equity — Neuberger’s heritage — and high-value fixed income such as high yield, leveraged loans and private equity funds of funds, including secondaries and co-investments. Without Lehman, Neuberger Berman might have remained a narrowly focused shop lacking the scale to compete in a market that now requires research, trading and products for different environments. “It ended up in a train wreck, but between the strong Neuberger culture and all that had been accomplished during the Lehman years, we knew the firm could survive,” Walker says.
It’s also true, as many at Neuberger now contend, that being privately held and not part of a large financial organization may be a competitive advantage. As a private firm, Neuberger Berman can decide to put all of the managers’ deferred compensation into Neuberger funds. “We sit across from clients and tell them, ‘We’re putting our dollars side by side with you,’” says CIO Amato, who headed Lehman’s Neuberger Berman from 2006 to the buyout and before that was Lehman’s global head of equity research. A private Neuberger doesn’t have specific goals like growth in assets under management, although it needs to keep key employees happy by growing. The structure also means the firm can give managers longer time frames and close funds that have grown too large.
“Private firms get preference in every respect,” says George Wilbanks, head of Stamford, Connecticut–based Wilbanks Partners, an asset management recruitment firm. “Employees love the structure because they don’t have the distraction of a parent company’s priorities or the market driving short-term decision making. Big investors like it because their managers can focus only on practicing their craft.”
Neuberger stands out as investors search for ownership structures that can produce optimal returns and stability. There’s been a backlash against publicly traded managers that need to produce growth for stockholders and hit quarterly earnings targets. And bank-owned money managers have stumbled amid their parents’ woes. Holding companies like Legg Mason and Bank of New York Mellon Corp. scooped up smaller firms, promising to centralize services like distribution and keep managers autonomous. The results have been mixed.
Charles Kantor, portfolio manager of the Neuberger Berman Long Short Fund, has been at the firm for more than 13 years, experiencing it as a public company, as part of Lehman and as a private partnership. He says that in the years before it went public Neuberger was perhaps too risk-averse, trying to protect what it had. Under Lehman the business didn’t have enough say in its own destiny. “We didn’t have enough scale in the boardroom to make a difference under the performance metrics that mattered to senior management of the mother ship,” Kantor says. “Now we have a leadership team that is pursuing a strategy relevant for our clients, and management has done a wonderful job protecting what we have while not being scared to invest for the future.”
The financial crisis and its aftermath changed many assumptions in investment management. Even though markets had stabilized by March 2009, many investors remained skittish. Active managers were punished for not beating benchmarks, while alternatives gained in popularity. Low interest rates drove investors to take more risk to achieve returns.
Since going private Neuberger has made aggressive moves to remain relevant. It has added emerging-markets debt — a gap in its fixed-income lineup — launched more hedge fund strategies and expanded private debt capabilities. It has sold off its money market funds, which became subject to new regulations and risks after the crisis.
Neuberger is making a big bet on its $18 billion in alternative assets. The firm moved quickly to take advantage of retail investors’ rising interest in alternatives and in the possibility that these products could be offered in defined contribution plans. (Hartford HealthCare, for instance, recently added Neuberger’s multimanager hedge fund to its defined contribution plan.) But asset managers like Neuberger are trying to break the code of how to get alternatives to mainstream retail investors. It’s a wide-open field: Only about 5 percent of individual investors have allocations to hedge funds.
Kantor, who had been running an alternatives strategy for institutions, in 2011 launched a fundamental long-short equity and fixed-income mutual fund designed to have minimal volatility. The fund, which has returned an annualized 13.5 percent, versus its benchmark’s performance of 8.02 percent, since inception, gathered $1.8 billion in two years, one of Neuberger’s most successful fund launches ever. “Traditional asset allocation models don’t work and aren’t designed to work in an environment where rates are 2.5 percent,” Kantor says. “There’s never been a better environment to go to clients with solutions like mine, because there are no other obvious things to do.”
In 2011, Neuberger hired David Kupperman — a physicist who had worked at the Applied Physics Laboratory at Johns Hopkins University and met Walker while at Goldman in the 1990s — to package hedge fund strategies in a mutual fund format. Kupperman, who once worked at Carlyle Group with co-founder David Rubenstein and at Paloma Partners, says he chose Neuberger for its mutual fund distribution capabilities and understanding of alternatives. Kupperman has since launched the Absolute Return Multi-Manager Fund. Nine hedge fund managers run their strategies in separate accounts specifically for the fund. Neuberger has full transparency to monitor potential problems, and investors get daily liquidity. “Our ideal is to have managers do everything they do in their regular hedge funds, with as little modification as possible,” says Kupperman. He believes most strategies could work well in Neuberger’s hedge fund structure, with the exception of distressed debt and some structured credit investments that are too illiquid.
Traces of Lehman remain at Neuberger. Anthony Tutrone, global head of Neuberger alternatives, decided to re-create the business of buying stakes in hedge fund management firms once Neuberger was on its own. While part of Lehman, the firm directly invested in hedge funds, including New York–based D.E. Shaw Group, using the investment bank’s balance sheet. Neuberger no longer has that balance sheet. Instead, the firm raised $1.28 billion in 2009 in its Dyal Capital Partners fund, which buys the stakes, then passes the hedge fund fees back to investors. Dyal has completed eight transactions, including investments in Capital Fund Management, Capstone Investment Advisors, Halcyon Asset Management and MKP Capital Management.
Michael Rees, chief operating officer of the alternatives group, says Neuberger had an edge because under the Dodd-Frank Wall Street Reform and Consumer Protection Act and its Volcker rule, banks can no longer invest in hedge funds. “I came at it from the perspective that hedge funds wanted to have partnerships with large firms,” he says. “We had the experience, and there was no competition.” The hedge fund firms not only receive a check from Neuberger but get client introductions and advice on everything from compliance to information technology.
So far, the alternatives bet has paid off. Before going private Neuberger had an effective fee rate of 48 basis points. Now that rate has risen to 59 basis points, in part because the firm is offering more complex, high-value strategies that justify higher fees.
Though active management has gotten tougher as competition has increased and investors have embraced index funds, CIO Amato says the firm remains committed to fundamental research and will continue to eschew popular products like exchange-traded funds.
Judith Vale and Robert D’Alelio comanage the Genesis mutual fund, a small-cap value strategy that represents a big part of Neuberger’s mutual fund family. The duo epitomize Neuberger’s culture: autonomy, outspokenness and long tenure. They relish their contrarian views despite the fact that their funds recently have been lagging the market.
“I’ve been here since ’92, and Bob joined in ’96,” Vale says. “We both have a lot of dust on us.” Genesis seeks high-quality businesses that have little leverage. The strategy does well by not losing money in tough times but lags when the market rises. “Companies with good cash flow don’t make good investment banking candidates, so the sell side leans to sexy growth companies,” says D’Alelio. “This bias is something that only surfaces over long time periods.”
The Genesis Fund has annual turnover of 17 percent, a fraction of the industry’s average, which is over 100 percent. Many of its investors have been in the portfolio since the early 1990s.
Perhaps the most surprising success at Neuberger is the globalization effort. Under Lehman the firm had $4.15 billion in assets from non-U.S. institutional clients. At the end of September 2013, it had $47.6 billion. London-based Dik van Lomwel, who heads distribution in Latin America and in Europe, the Middle East and Africa, says the firm has been opening offices and hiring locals in places like Singapore. Neuberger, he adds, now operates in 15 countries, compared with seven under Lehman.
Neuberger went private just as bond fund managers faced a particularly tough environment. Interest rates have fallen for 30 years, and the world that fixed-income managers once prospered in now seems to have disappeared. Even if rates don’t rise significantly, there’s no room to fall.
Because Neuberger wanted to be in the business of providing more complex — less commoditized — investments, its fixed-income franchise has large doses of high-yield bonds, leveraged loans and opportunistic funds. It recently added emerging-markets, distressed and private debt. That was smart: Core and core-plus fixed income are expected to be hit going forward as the bond environment changes.
Andrew Johnson, head of investment-grade and opportunistic credit, says investors want opportunistic fixed income: strategies that deviate significantly from benchmarks or absolute-return funds that can invest in multiple asset classes and allow managers to shift between sectors. The firm’s Strategic Income Fund, an opportunistic fund, has been growing dramatically. In 2008 it had $8.2 million in assets; it now has $1.2 billion.
But Johnson concedes that it’s hard to predict what investors will want from money managers. “So how persistent is this demand to be opportunistic?” he asks. “My honest answer is, I don’t know.”
Many of the industry’s precrisis models aren’t working that well. Walker notes that investors want Neuberger to invest for them in emerging markets more broadly rather than awarding a mandate for either debt or equity. Clients like the Teacher Retirement System of Texas and China’s National Council for Social Security Fund have forged partnerships with Neuberger, giving it latitude in how they invest and asking for high-value advice. “Debt, equity, let’s figure it out,” says Walker, who declined to comment on any clients. “Investors want partners to help them do better rather than vendors giving them a certain product.”
Like its portfolio managers, who average 27 years of industry experience, Neuberger has witnessed many market cycles. It was private when the industry was young, went public as asset managers became growth plays and came under Lehman’s wing when big banks thought money managers could be part of financial supermarkets. Next year Walker will write the last check to the Lehman estate, severing the firm from the failed investment bank and providing creditors with $1.5 billion. Neuberger Berman can then pitch itself as a 75-year-old start-up. • •
Follow Julie Segal on Twitter at @julie_segal.
