Even for a former McKinsey & Co. consultant, it is an audacious, and counterintuitive, business plan.
Just as other firms are abandoning pension consulting because of its lackluster returns, Kevin Greene is charging headlong into the industry. Until four years ago, when he bought his first pension consulting firm, the onetime investment banker had never even worked in investment consulting; now the brash 44-year-old is on his way to building a miniconsulting empire around CRA RogersCasey. “Pension consulting is a great place to be right now,” Greene proclaims, to the consternation of rivals bone tired of small margins and large migraines.
Has he lost his actuarial tables?
Pension consulting firms may be powerful and prestigious -- after all, they act as gatekeepers to $10 trillion in retirement and nonprofit assets. And money managers know they must genuflect to the firms to gain access to the portfolios of pension plans, foundations and endowments. But labor-intensive pension consulting, with operating margins of 10 to 15 percent, is far less profitable than money management, whose margins are twice that even in a bear market. Consulting firms charge fixed rates, not asset-based fees as money managers do, which helps explain why so many of the industry’s largest players have been exiting the business or scaling back their presence. Cost-cutting by consulting firms in recent years has only intensified the impetus to head for the exits.
The U.S.'s No. 1 pension consulting firm, Mercer Investment Consulting, has pared its client list and closed several offices. Other big players like Frank Russell Co. and Wilshire Associates are refocusing on asset management and analytic software.
Greene, meanwhile, has catapulted Darien, Connecticutbased CRA Rogers-Casey into the No. 3 slot in the industry. Coming from out of nowhere, he has completed three acquisitions in four years, and his firm now commands roughly a 6 percent share of all U.S. investment consulting. No. 2 Callan Associates has 8.2 percent; Mercer, 11.5 percent, according to Nelson Information.
“We are out to change the industry,” asserts Greene, who can sound more than a little brash at times. “If we get where we want to go, money managers and pension funds will never look at consultants the same way again.”
Greene’s carefully calculated bet is that CRA RogersCasey’s all-encompassing approach to cataloging money managers and its quantitative system for tracking the firm’s own performance as a selector of managers -- which Greene hopes to unveil this June -- will permit it to thrive in a stagnating industry.
“If we can just demonstrate the value proposition, we can get clients to rethink the very role of consultants,” Greene vows. “If you can show you add value, they’ll pay you, whether it’s an asset-based fee or a higher retainer.”
CRA RogersCasey is “emerging as an important player in the money management industry,” says M. Barton Waring, head of the client advisory group at Barclays Global Investors, the third-largest U.S. money manager, with total assets of $800 billion.
Rivals, however, remain skeptical. “We just don’t run up against CRA RogersCasey very much when we compete for new business,” observes Philip Schneider, a senior consultant at Watson Wyatt Investment Consulting in Chicago.
CRA ROGERSCASEY DOES WHAT all pension consulting firms do: It assists corporations, municipalities, nonprofits and universities in establishing their asset allocation, selecting their roster of money managers and monitoring performance. But Greene is writing a new playbook for consulting’s game plan, borrowing a page from SEI Investments Co. That has a strange symmetry, because SEI ditched consulting for money management in 1995, and today much of its jettisoned consulting operation forms the core of CRA RogersCasey.
Targeting smaller defined benefit plans, SEI, along with Frank Russell and Northern Trust Global Investments, engineered so-called manager-of-manager platforms that offered clients one-stop outsourcing covering custody, consulting and, most lucratively, asset management itself. Greene’s angle on this critical market is not to emulate SEI and Russell and be a manager-of-managers purveying a prescribed roster of fund managers; instead, CRA RogersCasey offers clients open architecture -- access to any managers anywhere, in the U.S. or abroad, that the firm judges to be worthy. Greene’s vision is nothing less than to let pension plans in effect outsource all their fiduciary responsibilities.
“We’ll be a master contractor,” he says. “We can offer the same kind of outsourcing as SEI or Russell, serving as a central integrator of money managers. But the big difference will be that the client isn’t force-fed SEI or Russell funds.” The CEO of SEI, Al West, recalling a similar initiative at his company in the 1980s, warns, however: “It was next to impossible. There were too many moving parts, and we gave up on it.”
CRA RogersCasey’s other putative marketing edge could be its quantitative system for tracking its own performance as a selector of portfolio managers. “Picking a collection of money managers is no different than picking a portfolio of stocks,” Greene maintains. “You can measure it. You can say, ‘Here’s my value added.’ We’re going to be more accountable to our clients. We’re going to put our neck a little further out on the line -- and that’s going to be a key to our success.”
Evelyn Brust, executive director of the Investment Management Consultants Association, thinks Greene is on the right track. “The biggest issue facing consultants today,” she says, “is how can they quantify their value added.”
Greene is not the first to attempt such a rigorous report card. A year ago Mercer began publishing a detailed analysis of its investment manager recommendations in 45 asset classes. Greene, however, contends that CRA RogersCasey’s system will be more precise and sophisticated than Mercer’s or any other competitor’s.
In CRA RogersCasey, Greene has a solid base for building a broad consulting franchise. Revenues for Greene’s Capital Resource Holdings, parent of CRA RogersCasey, hit $40 million last year; two thirds of that comes from consulting, with the remainder coming from brokerage commissions and a data-resources business geared to money managers. Operating profits, excluding some nonrecurring charges associated with the RogersCasey merger, were about $6 million. CRA RogersCasey’s operating margins of 15 percent are on a par with those of most consulting firms. The firm has 100 consultants, 30 of whom have ten or more years’ experience, and 25 analysts, and it is on full retainer to 185 institutional investors, half of them corporations. Among the more droppable names: Honeywell International, State of Connecticut Trust Funds and the University of Texas System. In all, CRA RogersCasey controls asset managers’ access to $500 billion.
“We have been leaning on CRA RogersCasey a lot more in a market like this,” says Larry Cope, a manager at the $640 million defined benefit plan of Columbia, South Carolinabased Scana Corp. Last month CRA RogersCasey presented Scana’s investment committee with a report on the 2002 performance of the fund’s nine money managers. The committee slashed the asset allocation of one underperforming equity manager. “I view CRA as a valuable extension of our investment team,” Cope says.
Greene believes that CRA Rogers-Casey’s quantifiable track record coupled with its aggregator approach to money managers should enable it to negotiate higher tariffs and -- the Holy Grail that has always eluded consulting firms -- charge fees based on the size of a client’s assets, like money managers. (Annual consulting firm retainers industrywide now typically range from $300,000 to $900,000.) Declares Greene, “I do think there is potential, eventually, to get up to 20 or 25 percent margin.”
Still, Stephen Holmes, president of St. Louisbased Summit Strategies Group, a CRA RogersCasey rival, cautions, “Just keep in mind that a lot of firms have tried to squeeze more out of consulting -- and failed.”
GREENE SEEMS TO THRIVE ON outsize challenges. Born into an Irish Catholic family in Huntington, Long Island, he was the fourth of five children. Much of his childhood was spent moving around the country as his father, a marketing executive with Shell Oil Co., changed assignments. But when Kevin was 12, his family settled in Summit, New Jersey.
Greene excelled as a student and as an athlete at nearby Oratory Preparatory School, where he was captain of the basketball team. As a sophomore at Georgetown University in 1978, he was conscripted to run the campus newspaper, The Voice, when the editor-in-chief abruptly resigned after a staff mutiny. “Overnight, Kevin went from the sports page to editor, and he rose to the challenge,” recalls Sean McCarthy, who was a writer for The Voice. “He always led by example and made hard work and pressure somehow seem fun.” But tragedy struck the next year when Greene’s father died of a heart attack on Thanksgiving Day. “To say I was devastated would be an understatement,” Greene says. “My dad was my best friend.”
Greene was to be devastated again 18 months later when just a few weeks after receiving his bachelor’s degree, his girlfriend was murdered in Washington, D.C.'s Rock Creek Park. “Burying your girlfriend when you are 22 is no easier than burying your dad when you are 20,” he says.
Looking for an escape, Greene took a job with the State Department teaching English to Cuban refugees, the Mariel boat people, at Fort Chaffee in Arkansas. “That was a different experience from anything I’d done before,” he recalls.
But after nine months, in March 1982, Greene dusted off his economics diploma and went to work for E.F. Hutton as a commodities analyst. Growing restless after three years, he quit to get his master’s degree in public policy at Harvard University’s John F. Kennedy School of Government. Never bashful about pushing to get what he wanted, Greene rallied students to successfully lobby the school to offer his chosen field -- international trade and finance -- as a thesis option.
Greene went on to earn an MBA in finance from New York University in 1988, then snared a sought-after job as a consultant at McKinsey. There he learned the nuts and bolts of financial services. In July 1991 the 32-year-old (and newly married) senior McKinsey consultant left to start Value Investing Partners, a New Yorkbased boutique brokerage and investment bank geared toward providing private placements for European institutions.
“I based the decision on minimizing regret,” Greene muses. “Yes, I’d regret not becoming a McKinsey partner, but I’d regret more not starting the business.”
The firm -- VIP for short -- quickly took off. Greene did his first deal -- a $10 million convertible debt offering -- in fall 1992, and over the ensuing seven years, the firm did more than $1 billion of private placements.
Out of the blue Greene got a call in October 1998 from an old prep school pal, Sean McNamara, an investor in Notre Capital Ventures. The year before, the Houston private equity boutique had picked up an ailing outfit called Capital Resource Advisors, or CRA, the former consulting arm of SEI Investments. Notre Capital didn’t want to get stuck with repaying the purchase loan from SEI, so it was thinking of unloading CRA. “Do you know anyone who might be willing to take CRA off our hands?” McNamara inquired.
Discarded by SEI as a dead-end business, CRA was operating in the red. But Greene, the ex-business consultant and banker, detected possibilities. He told his friend he would look the company over. “When I started doing the due diligence on CRA and peeling back the layers, I saw that pension consulting -- providing truly expert advice -- was always going to be in demand, and nobody really had a dominant brand,” says Greene. Plus CRA was a steal.
Scraping together $4.9 million -- most of it his own money -- Greene acquired the company (which had cost his pal close to twice as much) in September 1999 and plunged into the pension consulting business. Soon he was on a roll. The following April Greene snapped up Waltham, Massachusettsbased alternative investment specialist Wellesley Group for $4 million, and a year later, in April 2002, he made his biggest purchase to date: Barra RogersCasey, for $14 million.
Founded in the mid-1970s as Rogers, Casey & Barksdale by Edgar Barksdale and John Casey, PaineWebber pension consultants, and Steve Rogers, a former portfolio manager, the firm recruited top talent and in the 1980s earned a glittering reputation. California quant shop Barra acquired it in 1996, renaming the firm Barra RogersCasey, but unloaded it to Greene because pension consulting seemed such a disappointing business.
CRA’s takeover of Barra RogersCasey got off to a disastrous start. On April 1, the day the merger took effect, 15 mostly senior Barra RogersCasey consultants, led by CEO Robin Pellish, walked out. A few months earlier they had attempted a management buyout. The gang of 15 soon opened Rocaton Investment Advisors, a rival consulting shop. “When you do an acquisition following a failed management buyout, you expect that not everybody is going to be on board,” Greene shrugs. “Look, there were 86 people at the firm when I bought it. Some key people left, but a great group of 70 people stayed.”
Although CRA RogersCasey obtained a restraining order to prevent Rocaton from soliciting its clients, those clients were free to move voluntarily -- and many did. Thirty of RogersCasey’s 80 clients went to Rocaton. The defectors included the firm’s biggest client: the $25 billion Teachers’ Retirement System of the City of New York. In a stroke Greene’s pension consulting enterprise forfeited more than half of the revenues of its new acquisition.
Greene acted quickly to shore up sagging morale. He scored a major victory when he persuaded well-liked longtime RogersCasey consultant Steve Case, who had bolted in 1998 for Putnam Investments and then Axa Financial, to return as a managing director. CRA RogersCasey CEO John Dickson is a recruit from Mercer. Greene also lured back RogersCasey veteran Timothy Barron from Morgan Stanley Investment Management to be research chief. And a few senior Barra RogersCasey consultants stayed on, including Beth Henderson, now a managing director.
Despite the initial turmoil, CRA RogersCasey has managed to land 16 new clients since the merger, including such high-profile names as the Boston City Retirement System, Citigroup, Rayonier and Weyerhaeuser Co. And, just as important, the firm has lost no other big clients.
Nevertheless, RogersCasey founding partner Casey suggests that the firm has yet to recover from the Rocaton fallout. “When you stub your toe the way Greene did with his clumsy handling of the acquisition, it takes a while to bounce back,” contends Casey, who left Barra RogersCasey well before the deal to start a new consulting firm, Casey, Quirk & Acito. Greene fiercely disputes Casey’s implication that he could have done more to induce Pellish and the other departees to stick around.
One CRA RogersCasey client, the Pennsylvania State Employees’ Retirement System, put its general consulting assignment out to bid earlier this year. Rocaton wrested the mandate away. Says a spokesman for the pension system, “Rocaton had the best people.”
Clearly, the strains from the Rocaton exodus linger. But last month Greene resolved one persistent problem that had been hampering CRA RogersCasey in winning new business: He sold off its controversial brokerage affiliate, Capital Resource Financial Services, to Bank of New York Co. Terms of the deal have not been disclosed, but sources say the price was about $30 million. Though he sacrificed an operation that generated 30 percent of Capital Resource Holdings’ revenues, Greene’s move made strategic sense.
Like other consulting firms that own brokerage affiliates, CRA RogersCasey had faced criticism that its choice of asset managers was necessarily in conflict with its desire to earn commissions through a so-called recapture program. Under such a scheme, a pension plan instructs its money managers to direct a certain proportion of their high-margin trades through a consulting firm’s brokerage affiliate, which then kicks back a chunk of the commissions to the plan. The potential for abuse, of course, is that the consulting firm might be tempted to choose subpar money managers because they’re more willing to play along. Greene insists that he sold the brokerage not because it presented a conflict of interest but because it didn’t fit the new CRA RogersCasey. “It was simply not part of our core business,” he says.
The top item on Greene’s agenda now is to roll out the new performance-tracking system before summer. CRA RogersCasey follows 1,500 portfolio managers and 4,000 investment products across all traditional asset classes, in the U.S. and overseas. The firm groups managers into top tier, second tier and third tier, and as part of the new regime, it intends to compare its top-tier selections with their peer groups and against benchmarks, taking into account rebalancing costs and other technical factors. “We do not plan to add results of disparate asset classes together for the purpose of marketing our track record,” says research chief Barron.
The just-completed sale of its brokerage business gives CRA RogersCasey a considerable war chest. “We can invest for the future growth of the consulting practice,” Greene says. “Show me someone investing that kind of money into pension consulting.” Or that kind of enthusiasm.
