Peter Sundman had a problem. As head of Neuberger Berman’s retail business, Sundman was only too aware of how dismally three of the money manager’s best-known mutual funds, Century, Manhattan and Millennium, were performing: Each loitered in the bottom quartile of its peer group. The combined assets of the firm’s small-, mid- and large-cap growth funds had shrunk from $5 billion in 2000 to about $2 billion at the start of this year. Sundman felt sure that growth stocks would make a comeback, but he lacked confidence in his stock pickers.
So in early January he picked up the phone and called Robert Warren, a secretive recruitment specialist whose firm, Warren International, is based in New York. “I’m in the market for a top-notch growth team,” Sundman told Warren. “Who’s available?”
He’d called the right man. Warren knew of a well-regarded group that was looking to jump ship. Within weeks he’d fashioned a deal in which a five-person growth equity team that had been managing $3 billion moved from Northern Trust Global Investments to Neuberger. The Chicago-based group, led by Jon Brorson, took charge of Neuberger’s three growth funds, and the incumbent stock pickers were dismissed. So far the team has attracted little new money -- less than $10 million -- but all three funds are now beating their benchmarks. (Last month Lehman Brothers Holdings acquired all of Neuberger for $2.7 billion.)
“We didn’t get as much in assets to come over as we would have liked,” allows Sundman. “But we got a great team.”
Lanky and soft-spoken, with graying hair down to his shoulders, Warren, 59, has worked in money management recruitment for three decades, emerging of late as the leading practitioner of a specialized, increasingly popular -- and controversial -- brand of head-hunting known as the liftout. Always secret and frequently hostile, liftouts move entire teams of portfolio managers and analysts from one asset management firm to another. Although money managers themselves occasionally arrange these transactions, more often they rely on intermediaries like Warren who will pinpoint the right team and help hammer out terms acceptable to both sides. In theory, such deals allow investment specialists to find more supportive homes and nice hikes in pay while money management companies get to quickly plug holes in their product lines without having to resort to more-costly acquisitions.
Although much less common than mergers and acquisitions, the liftout is becoming an increasingly popular method of recruitment. Firms still chase after individual star portfolio managers, but these days a collective effort is more often responsible for a superior track record than any single person’s skills. Hiring a group increases the likelihood of continued strong returns and provides greater depth of expertise. And when key members of a team move together, industry regulations allow the hiring money manager to market the group’s track record as its own. That can be a critical tool in attracting new assets. According to Rosemont Partners, a West Conshohocken, Pennsylvania, investment bank, four such deals closed in 1998. That total hit 12 in 1999 and 16 in 2000 before falling to 11 in 2001, nine last year and two so far this year. (More than 100 asset management acquisitions closed in 2002.)
Notable recent liftouts include American Express Co.'s February 2002 liftout of three Fidelity Investments large-cap portfolio managers and this June’s departure of five National City Investment Management Co. portfolio managers. The latter liftout was orchestrated by former institutional sales executive Matthew Bevin, who formed a new money management firm, Integrity Asset Management, in Independence, Ohio. Neither deal involved a middleman.
Among firms currently on the prowl for possible liftouts are Putnam Investments, which is looking for both equity and fixed-income expertise, and bond specialist BlackRock, which aims to fill out its equity department. In February, BlackRock took a large-cap quantitative equity team from Weiss, Peck & Greer in a deal crafted by Warren rival Ev Nucci of Nucci Consulting Associates in Blue Bell, Pennsylvania.
Liftouts are hardly ever straightforward. They are almost always contentious and sometimes downright nasty. The defectors’ firm often strikes back with a lawsuit, as State Street Global Advisors did back in 1999 when an eight-person indexing team bolted for Deutsche Asset Management in a controversial Warren-led deal. That’s why money management executives turn to experienced intermediaries like Warren, who usually know all the players and have the savvy to fortify legal defenses in advance. Most important, perhaps, they are discreet enough to keep negotiations quiet until the deal is done.
“It’s never easy to transplant an entire team. All the pieces have to be lined up perfectly. You have to be prepared for all possible contingency plans,” says Warren. His first liftout came in 1994 when he helped move an international equity team from a PNC Bankowned boutique to Boston Co. Asset Management. Last year he notably staged the defection of an eight-person fixed- income unit from Wachovia Corp. to Lazard Asset Management.
Warren pockets a handsome fee for his labors: one third of the first year’s compensation for each team member, paid by the hiring money manager. Most of his work, and the majority of his firm’s revenues, still comes from the traditional fare of recruiting one executive at a time, but liftouts are a lucrative sideline. Although he won’t reveal specifics, Warren is said to earn about $10 million a year.
“These deals take a serious amount of due diligence,” says rival Nucci. “Sometimes, after all the time put in, you end up bailing out on the deal because you find it just isn’t the right fit.”
Warren’s low profile belies a first-class money management Rolodex. “He knows everybody,” says Chas Burkhart, founder of Rosemont Partners. Of the 20 major U.S. liftout deals in 2001 and 2002, Warren arranged seven. (Most of the remainder involved no intermediaries.)
Dividing his time between offices in Manhattan and Palm Beach, Florida, where he also owns a beachfront estate, Warren spends much of his day stretched out in a chair, talking on the phone and jotting notes in pencil on a small white pad. He doesn’t use a computer or PalmPilot to jog his memory. Says Kathleen Tompkins, a recruiter at Warren International, “It’s all in his head.”
Warren’s niche grew out of the acquisitions that swept the industry in the late 1990s. Many of these deals have delivered disappointing results -- virtually all seem pricey in retrospect -- and they’ve left fund executives skittish about spending lavishly to buy an entire money management operation. “Firms are gun-shy about doing acquisitions because so many have come undone, and as a result, they are more inclined to pursue liftouts, which are much less expensive,” says James Kranz, senior consultant with CRA, a consulting firm in San Francisco.
Notes Warren: “Everybody is realizing now that they overpaid for money management companies. They still want the talent, but they are more cost-conscious.”
And even though some managers grew big through acquisitions, they still find that they need to fill in gaps or address weaknesses in their product lineups. “Liftouts have redefined how money management companies go about building their business,” says J. Nicholas Hurd, head of the money management practice at New Yorkbased executive search firm Russell Reynolds Associates.
“There are a lot of liftout opportunities out there for firms that understand the risks and rewards and know how to construct a deal that will stick,” Warren says. “In this business you can never be too careful.”
EVEN IN HIS YOUTH WARREN DISPLAYED A KNACK for recruiting. Growing up in the working-class Inwood section of upper Manhattan, the eldest son of a real estate manager and a housewife, Warren attended elite Stuyvesant High School, which was then an all-boys institution. Warren served as “social chairman,” organizing dances. “It was my job to make sure we had girls there,” he recalls.
While at City College of New York, he dallied with the idea of becoming a doctor, then transferred to Long Island University, earning a BS in finance in 1967. He landed his first job at Irving Trust Co., working as a trainee in the development of new clearing systems and other technology issues, while pursuing a business degree at night at LIU. Before long the 23-year-old was swapping information with his counterparts at other bank trust departments. He discovered he had a talent for matching people with jobs. “I got to know everybody,” he says. “It just seemed like I was always getting people together.”
Warren received his MBA in 1969. That same year he took $5,000 in savings and set up shop in the boiler room of his Manhattan apartment building. The business plan for the newly christened Warren Inc.: to teach brokerage and bank employees about clearing systems. The 25-year-old CEO streaked his hair gray so he would look more mature.
When recession hit in the early 1970s, Warren shifted to head-hunting. By the late 1970s he had staked out a niche in asset management; in the 1980s he expanded his efforts overseas, helping independent money managers hire investment professionals for their new London and Tokyo offices. By the early 1990s Warren Inc. had become Warren International and was working solely for money management firms.
Warren’s first liftout came in 1994. One of his major accounts, Boston Co. Asset Management, which had been bought by Mellon Bank Corp. in 1992, decided to build a new international equity group, having spun off its global team into PanAgora Asset Management, a separate Mellon division, three years before. Boston Co. CEO Desmond Heathwood -- who had originally met Warren through Christopher (Kip) Condron, then vice chairman of Mellon -- gave him the mandate to recruit a new team.
Canvassing his sources, Warren heard about a little-known international equity portfolio manager named D. Kirk Henry, then working for Cashman, Farrell and Associates, a small, PNC Bankowned asset manager in Berwyn, Pennsylvania. Henry, along with another portfolio manager, Sandor Cseh, handled about $300 million, and their portfolio had outperformed the Morgan Stanley Capital International Europe, Australasia and Far East index in each of the previous five years by an average of 2 percentage points. Henry was willing to hear about other job prospects but didn’t want to go to a new firm without Cseh. Heathwood agreed to hire both and gave them hefty pay raises along with Mellon stock.
“Liftouts were just beginning to be talked about,” recalls Henry. “When [Warren] called it seemed like an opportunity to take our product to the next level.” As a welcome postscript, within a year most of the $300 million they had managed followed the twosome. Today Henry runs a $3 billion international stock portfolio for Boston Co.; Cseh is retired.
As for Heathwood, in April 1995 he led a group of 34 Boston Co. professionals to start Boston Partners Asset Management. The firm, which specializes in value equity, now has $8.5 billion in assets under management. Last summer it sold a 60 percent stake to Robeco Group, a Netherlands-based money manager, reportedly for about $240 million.
Even among money managers who like to do their own recruiting, Warren sometimes gets a call when the assignment is urgent. “I call Robert Warren when we have a high-level opening and it is critical that we get someone in there right away,” says David Lamere, head of Mellon Financial’s private wealth management group.
In the summer of 1999, few firms were in a bigger hurry than Deutsche Asset Management. DeAM’s New York office had lost its five-person index team to Merrill Lynch Investment Managers. Determined to quickly replace the group, the firm’s then-chief, Michael Dobson, contacted Warren, whom he knew by reputation.
Warren was aware that the ten portfolio managers in State Street Global Advisors’ index group, led by Dean Barr, felt that they were underpaid and underappreciated. Warren called Barr, whom he’d known for years, at home one weekend and suggested a meeting in Boston. It didn’t take long to reach an agreement, and in late August Barr and his nine associates gave notice. An hour or so later, eight of the group joined Warren in a private suite at the Four Seasons Hotel in Boston to review their possible responses to any retaliation from their former employer.
They were a little too late. The two remaining members of the team, Peter Leahy and Paul Brakke, had also resigned but were stopped by several SSgA executives as they were getting ready to leave their offices. Unfazed, Warren reached Brakke by cell phone just as the executives started asking them questions. “The whole situation was really tense,” recalls one of the portfolio managers in the room with the recruiter. “But Warren kept everybody calm.”
State Street made the pair such attractive counteroffers that even their departed colleagues encouraged them to stay with the indexer, and they did. Still, SSgA later filed suit against the defectors, charging that the most-senior executives -- top portfolio manager Barr, sales executive Richard Goldman and portfolio manager Joshua Feuerman -- had violated their noncompete agreements and inappropriately lured clients from SSgA to DeAM. In 2000 the suit was dropped, but not before court papers revealed that Warren had collected $2.3 million in fees from DeAM. (Several months ago Barr left DeAM to start a hedge fund, Thunder Bay Capital Management.)
Often Warren finds his fees amid the fallout from money management acquisitions gone sour. Such was the case in one of last year’s largest liftouts, in which an eight-person fixed-income team from Wachovia jumped ship for Lazard.
The group was originally from Offitbank, an $11 billion, New Yorkbased private bank that Wachovia had purchased in 1999. Three years later Wachovia was bought by First Union Corp., and Offitbank founder and CEO Morris Offit, who had opposed the deal, quit. Feeling disenfranchised from their new fund management unit, Evergreen, the onetime Offitbank fixed-income portfolio managers, led by Steven Blitz, proved receptive when Warren came calling in mid-2002.
The recruiter knew that Lazard, one of his full-retainer clients for general executive-search work, was looking to bolster its fledgling fixed-income unit through either an acquisition or a liftout. What’s more, fixed-income chief Kenneth Weiss had been clashing with Lazard Asset Management CIO Norman Eig. Morale was low among the bond managers.
After a brief meeting Eig agreed to bring Blitz, high-yield manager William Charlton and six other investment professionals over to Lazard. Weiss was forced out. The deal closed in November 2002, netting Warren nearly $2 million in commissions.
Warren’s ability to deliver talent has made him the first call for many a money management executive -- even those who find themselves short-staffed because of him. Recently, Warren received a voice-mail message from the CIO of a firm from which he had just poached a team. Thinking that another exasperated executive was calling to make a legal threat or vent some steam, Warren was surprised to discover that the man was merely requesting a meeting.
“It’s a small industry, when you get down to it,” Warren says. “Who knows? Maybe he wants to do a deal.”
