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How much does investment banking virtuoso Bruce Wasserstein know about money management? The answer may determine the future of the Lazard partnership.
Bruce Wasserstein knows a thing or two about investment banking.
Since taking over as head of Lazard in January 2002, he has put the renowned 155-year-old advisory firm back in the thick of things, winning high-profile mandates and front-page headlines. Under Wasserstein, Lazard advised Bank One on its $58 billion merger with J.P. Morgan Chase & Co. (the biggest deal since 2002), and counseled Hollinger International, Conrad Black's publishing empire, on the pending sale of its assets. In perhaps his most satisfying moment, Wasserstein snatched New York magazine from the grasp of real estate mogul Mortimer Zuckerman in a brilliant 11th-hour maneuver that ensconces him in the white-hot center of New York City's media establishment. The activity caps Lazard's surge back up the global league tables -- rising from tenth in 2001 to sixth in 2003.
How much the man once known as "Bid 'em up" Bruce knows about money management is another question. But it's one that could very well be more important for the future of the firm -- not least because some observers believe that Lazard senior partner Michel David-Weill brought the legendary deal maker into the firm to fix it up to sell. Lazard's banking arm may get the acclaim, but its asset management operation has long been the hidden jewel in its crown. For years it was the most profitable division of the company, consistently delivering between one third and one half of the firm's income.
These days, however, Lazard Asset Management is in turmoil, plagued by poor performance in its stock portfolio, a rash of senior-level departures and a debilitating leadership vacuum. Last year most of the top brass of the group's lavishly profitable hedge fund unit walked, taking with them much of its assets.
The problems date almost exactly to the moment Wasserstein took charge just over two years ago. The timing is largely a coincidence: Wasserstein is not directly to blame for LAM's troubles. On the other hand, he hasn't solved them, either -- bad news for the asset management arm and the firm. While LAM drifts, it has lost executives, clients and the trust of some pension consultants, who are instrumental in awarding management mandates.
The latest round of troubles came to a boil in October, when one of LAM's co-CEOs, the pensive, soft-spoken Herbert Gullquist, 66, retired. Since then LAM has been in a state of disarray as insiders jostle for position and outsiders speculate about the future of Norman Eig, 62, LAM's co-chief for the past 22 years.
Even critics credit Eig and Gullquist with creating the money-spinning operation out of whole cloth but add that the pair stayed too long at the party, without preparing an obvious successor.
Blunt and combative, a commanding presence despite his diminutive stature, Eig has for the past several months been renegotiating the terms of his contract. Whether Eig stays or goes, a source says, he will benefit from a sale or spin-off of either LAM or the entire partnership. (Neither Wasserstein nor Eig would talk to Institutional Investor, and Lazard made no executives available for comment).
While Eig focuses on his future, LAM's own prospects -- and future leadership -- have become less certain. Wasserstein has ventured solutions, but to no avail. He tried and failed to keep hedge fund supremo William von Mueffling in January 2003. Last July he recruited Ashish Bhutani, the former co-CEO of Dresdner Kleinwort Wasserstein North America and a longtime confidant, to serve in a strategic planning role. In the fall Bhutani and four LAM veterans were installed on a new "oversight committee," for the firm. Bhutani was initially pegged as a successor to Eig, but sources say that other top LAM executives have been balking at his possible succession. Uncertainty reigns. Indeed, a succession plan was expected to be revealed in November, but it has been put on indefinite hold, according to a reliable source.
"If any succession planning is going on, it's only logical, because Norman Eig is nearing retirement age," says the source.
None of this has been good for business. "I wouldn't put Lazard on any short list right now," says Richard Dahab, CEO of Dahab Associates, a leading pension consulting firm based in Bay Shore, New York. "Its focus seems to be more on trying to keep the ship from sinking than on managing money."
THE LAZARD SHIP BEGAN TO LIST ON A COLD morning in mid-January 2003 when von Mueffling walked out of his sunny corner office and took the elevator from the 58th floor to the 62nd floor of 30 Rockefeller Plaza, the Manhattan headquarters of Lazard Asset Management. The 35-year-old star of Lazard's $4 billion hedge fund group was on his way to see Wasserstein. Von Mueffling assumed it would be a perfunctory exit interview -- he had given notice just a few days before -- but when he sat down in Wasserstein's spacious office, the CEO dispensed with small talk and looked him straight in the eye.
"What can I do to get you to stay?" Wasserstein asked.
He had good reason to want to keep von Mueffling, whose top-performing and enormously lucrative hedge funds had kicked in fully half of LAM's earnings in the preceding year. Those profits -- and with them much of the partners' take-home pay -- might well disappear if von Mueffling were no longer running the show.
As it turned out, Wasserstein was too late. Von Mueffling, who had bridled under Eig, was upset by the amount of equity in LAM offered to him and his team under a recent plan -- created by Wasserstein and carried out by Eig -- to dole out ownership stakes in the money management firm. Von Mueffling had asked Eig for a larger stake, but the LAM chief rebuffed him, and he resolved to start his own firm. When Wasserstein tried to persuade him to stay, offering a substantial hike in compensation, Von Mueffling told him his mind was made up. Then he walked out the door.
Within eight months, 75 percent of Lazard's hedge fund assets had departed as well, most of it following von Mueffling out the door to his new firm (Von Mueffling declined to comment).
The hedge fund debacle is today only the most glaring of Lazard's woes. Lazard Asset Management was once part of an elite cadre of institutional money managers. Its struggles tell a sobering tale about the fragility of the money management business, where performance can deteriorate and clients can vanish overnight. LAM has been cut loose by institutional investors -- nearly 200 clients have fired Lazard in the past three years -- and abandoned by many of its top staffers; 50 of its 150 most senior executives and investment professionals, including former marketing chief Robert Morgenthau Jr., have exited in the past three years.The most recent departure: Brian Meath, a director and secretary to the oversight committee, who left last month. He had no new job lined up.
LAM saw its global assets plunge from a peak of $74 billion in 2000 to $50 billion in March 2003. The rise in equity markets last year, as well as some new accounts in the U.K. and Australia, pushed assets up to $69 billion at year-end. But these gains disguise the fact that LAM's two most profitable businesses, hedge funds and international equity management, have been hard hit. Hedge fund assets fell from $4 billion at the start of 2003 to $1.3 billion at year-end. And assets in U.S. institutional equity portfolios fell from a peak of $16 billion in 1999 to $7 billion at the end of last year.
The internal strife uncannily resembles the circumstances that famously played out at the parent company in the late 1990s. Then, an aging David-Weill, Lazard's longtime senior partner and CEO, moved to strengthen his hold on the firm. In the summer of 1999, at the age of 66, David-Weill merged the New York, London and Paris houses of Lazard and declared that he would not be retiring for at least five years. Several months later Lazard's leading New York rainmaker, deputy CEO Steven Rattner, and a raft of A-list bankers bolted from the firm, which soon fell in the critical M&A league tables. In early 2002 David-Weill finally loosened his control, selling an undisclosed but sizable portion of his ownership stake to Wasserstein, who became CEO.
Whoever takes charge of Lazard Asset Management will have his work cut out for him in revitalizing a midsize money manager focused on the institutional and high-net-worth markets. With a global client base, LAM ranks 68th on Institutional Investor's roster of the 300 largest American money managers. At the start of the year, it reported $45 billion in institutional assets and $24 billion in retail and high-net-worth assets.
That's a healthy mix, but LAM's core competency -- managing international equity portfolios for pension funds -- is a mature business and has been since the late 1990s. What's more, relative performance has been weak, with the flagship international equity portfolio trailing the Europe, Australasia and Far East index by more than 8 percentage points in 2003. Since 1990, LAM has focused most of its talent and resources on international stock picking. Its current asset breakdown is roughly 65 percent international and global equity, 15 percent domestic equity, 15 percent global fixed income and 5 percent alternative assets and cash.
Although its marquee business, M&A advisory, is famously volatile, Lazard could depend upon a steady stream of profits from an asset management division that operated almost as a stand-alone operation. David-Weill rarely meddled with LAM, which since 1982 has been under the leadership of Eig and Gullquist. Lured to Lazard from Oppenheimer Capital in November of that year, in part because of their connections to union pension plans, Eig and Gullquist joined as partners; Gullquist assumed the title of CIO, and Eig served as the de facto CEO. Together they helped LAM become a major player in the Taft-Hartley world. From the beginning of 1983 through the end of 1986, assets grew from $2 billion to $8 billion, the vast majority in U.S. equity portfolios.
That year Lazard stumbled into international stock picking when a large pension client asked the money manager to run a portfolio composed exclusively of non-U.S. stocks. By happenstance Lazard was able to boast one of the first track records in foreign equity when the asset class took off in the early 1990s.
For much of his tenure, Eig delivered solid results. By 1995 LAM's assets had grown to $30 billion. In addition to its international expertise, LAM also profited from a growing presence in the market for wrap accounts, which offer personalized portfolio management and charge higher fees than mutual funds. The group was run by marketer Morgenthau, who in 1990 joined Lazard from Shearson Lehman, which owned wrap pioneer E.F. Hutton. Under Morgenthau's direction Lazard became one of the first money managers to capitalize on wrap programs; assets in these accounts soared from virtually nothing in 1990 to some $15 billion by 1998.
Although Eig won praise for Lazard's asset growth, staffers chafed under his demanding management style. He was a polarizing figure, inspiring intense loyalty in his supporters and fear in everyone else. As he got older, staffers also worried about his stubborn refusal to groom a successor.
Often Eig used his sense of humor as a cudgel. In the mid-1990s, when recently named partner Morgenthau told Eig that he objected to his year-end bonus, Eig laughed, put Morgenthau into a headlock and paraded him through the office. "You should just be happy I let you stay here," Eig joked (Morgenthau declined to comment). In early 2001, Morgenthau, then marketing chief and a potential successor to Eig, left LAM to join Bank of America Asset Management Group. A year later he started his own firm, NorthRoad Capital Management, and recruited six Lazard staffers to join him.
LIKE MANY INVESTMENT BANKS THAT DEVELOP A sideline in money management, Lazard was looking for a steady revenue stream to offset the ebbs and flows of M&A work. Unlike most banks, though, Lazard has mostly taken a hands-off approach to the business. For many years that strategy worked well.
A small-scale money management operation was launched at Lazard in the 1940s, some 90 years after the firm's founders, Frenchmen Alexander and Simon Lazard, started the business in New Orleans. David-Weill, the partnership's CEO from 1977 to 2001, is a descendant of the Lazard clan. He succeeded Paris-born financier Andre Meyer, who joined Lazard in 1925 and transformed it into one of the most powerful investment banks in the world.
Until the mid-1970s, Lazard's money managers handled the financial assets of wealthy executives, often CEOs of companies that Lazard served as financial adviser. "We were a small division of the bank running accounts for wealthy executives at companies where there was a corporate finance relationship," recalls Stanley Nabi, a managing director with Credit Suisse Asset Management who was running a small investment firm when Meyer recruited him to become head of research at Lazard's asset management group in the mid-1970s.
When David-Weill took over for an ailing Meyer in 1977, he began to think about expanding asset management, which was then producing less than 10 percent of total profits. As pension assets moved out of banks and into investment firms and Lazard rivals like Morgan Stanley and Merrill Lynch & Co. diversified into money management, David-Weill figured that Lazard had to make the same move to remain competitive.
In 1982 an investment banking relationship presented Lazard with its opportunity. At the time, Lazard managed just $1.9 billion, mostly U.S. equity, to rank 166 on the II 300. That spring Lazard advised Oppenheimer & Co. on its sale to London-based Mercantile House Holdings for $162 million. David-Weill got to know the two senior executives who were running Oppenheimer Capital, the firm's fast-growing institutional management division, a value equity shop managing about $3 billion in assets, mainly in union pension accounts. Eig, then 41, and Gullquist, then 45, impressed David-Weill as quick studies who were well connected in the union world.
David-Weill reportedly promised them that they would have a free hand in running the money management business with Nabi, LAM's chief investment officer. Eig and Gullquist were quickly sold on the deal.
But the three-man team proved to be one man too many. A year after they arrived at Lazard, Eig and Gullquist called Nabi into a small conference room. Eig, as Nabi recalls, was blunt. "We don't like you," Nabi says Eig told him. "We don't want to work with you." "I said nothing and left," Nabi reports. "Later I spoke to Michel David-Weill. He said he felt terrible, but he told me there was not much he could do." Nabi quit to join Bessemer Trust as chief investment strategist.
As CEO, Eig focused on recruiting new clients, including some former Oppenheimer accounts; in all, less than $1 billion of Oppenheimer's $3 billion in pension accounts made the move to Lazard. Then, in the mid-1980s, Eig got an unexpected break when a big pension client, Consolidated Paper, asked Lazard to manage a portfolio composed exclusively of international stocks. Eig agreed to it without giving the matter much thought. In retrospect Lazard was seeding a track record in 1985 in a big asset class, five years or so before it took off in institutional circles.
With its expertise in international stock picking and its growing success in selling wrap accounts, LAM's assets increased from $5 billion in 1985 to more than $30 billion by 1995.
The success of the money management group was overshadowed that year by a municipal bond underwriting kickback scandal. After he left the firm, a former Lazard banker was found guilty of taking bribes, while at Lazard, to recommend underwriters to municipalities that Lazard served as an adviser. At the same time, the partnership was roiled by a battle between star entertainment banker Rattner and veteran Felix Rohatyn, Lazard's top deal maker and the man who famously helped stave off bankruptcy for New York City in the 1970s.
Turning his attention to the money management group, David-Weill decided in 1997 to merge the asset management operations of two of the three Lazard houses, uniting London and New York; the Paris office remained autonomous. The reorganization represented a vote of confidence in Eig and Gullquist's performance; the two men would run the global operation as co-CEOs. Even before the reorganization, the duo persuaded David-Weill to substantially hike their compensation. The Lazard senior partner granted them a whopping 30 percent, 15 percent apiece, of LAM's profits. In 1998, Eig and Gullquist each took out $30 million.
In the spring of 1997, Rohatyn left Lazard to become ambassador to France and David-Weill tapped Rattner to become deputy chief executive and head of the New York office. But the 64-year-old David-Weill remained very much in charge of the Lazard empire.
He allowed Eig and Gullquist to continue to enjoy almost complete autonomy. LAM, benefiting from its fast-growing wrap and institutional business and the rising market, reported assets of $70 billion in 1998. The group kicked in $150 million in profits, one third of the partnership's total. The following year LAM contributed $200 million, or about half of the partnership's earnings.
Those healthy profits reflected the fact that LAM was outperforming its peers in the core product that had made its reputation -- international equity. In 1999 more than half of LAM's institutional clients, who together provided about 55 percent of total assets, hired Lazard for international equity portfolio management, which carried average fees of 75 basis points, compared with 35 basis points for U.S. equity products.
Still, LAM's asset growth was held back because foreign equity performance significantly lagged behind U.S. stocks during the bull market peak between 1997 and 2000. But at this point the partners had other, more pressing concerns. As the bull market roared, Lazard's three houses struggled over power and pay. Not for the first time in his 22 years at the helm, David-Weill responded by tightening his grip. In the spring of 1999 he announced a reorganization that united all units of Lazard's three houses. At the same time, David-Weill, through an entity he controlled with the families of ex-Lazard partners, consolidated ownership by buying back a stake in the firm held by U.K. media company Pearson. The moves were widely perceived as a blow to Rattner's New York power base. In June 1999 David-Weill named William Loomis, the former head of investment banking and a Lazard veteran, to replace Rattner as deputy CEO. Seven months later, in February 2000, Rattner left Lazard and soon after formed Quadrangle Group, an investment banking boutique specializing in media and entertainment.
During this boardroom turmoil, La-zard's money management group quietly scored a major success in a hot new field -- hedge funds.
Lazard had entered the hedge fund arena back in 1991 when Michael Rome, a U.S. equity portfolio manager, set up Lazard Global Opportunities, a long-short fund. Lazard partners could invest in the portfolio, but it was not aggressively marketed to outsiders. Seven years later von Mueffling, an international small-cap manager, launched a second hedge fund, Lazard European Opportunities. Von Mueffling took it upon himself to aggressively sell the European Opportunities product, and it took off almost immediately after its August 1998 debut.
Opening the month before the infamous Long Term Capital Management had to be bailed out, the timing of the launch was less than ideal, but its performance soon made up for that. In 1999 Lazard European Opportunities returned 182 percent; when it closed in August 2000, it had amassed $1 billion in assets. The fund's strategy: making an equal number of long and short bets on about 200 stocks.
Von Mueffling followed this success by launching another fund, Lazard Worldwide Opportunities, in 2001, adopting a similar investment approach across global markets. It lost 14.4 percent in 2001 but was up 20 percent the following year.
Even a cursory glance at LAM's bottom line revealed the critical importance of the hedge fund business -- and the man who made it possible. Von Mueffling did not publicly profess any ambition to higher office at Lazard, but in the summer of 2001, managing director John Reinsberg, a veteran stock picker in the international equity group, reportedly made a pitch to Lazard deputy CEO Loomis: Replace Eig and Gullquist with Reinsberg as CEO and von Mueffling as CIO of Lazard Asset Management.
Eig and Gullquist were vulnerable. Despite the hedge fund bonanza, total LAM assets were down to $70 billion from a mid-2000 peak of $75 billion; portfolio performance was subpar, with the U.S. equity product in the bottom quartile of its peers; and morale was low in the wake of several key executive departures, including those of Morgenthau and John Chatfeild-Roberts, head of the U.K.-based fund-of-hedge-funds marketing.
Sources report that Loomis relayed the proposed putsch to David-Weill. But other events took precedence. At the time, Lazard was discussing a possible acquisition by Lehman Brothers; several weeks later the Twin Towers fell, and the acquisition was set aside.
As it happened, David-Weill was already contemplating a far more significant management shift -- relinquishing his own title as Lazard CEO and handing the reins to Wasserstein, whom he'd been trying to recruit for 18 months. In early December David-Weill announced that Wasserstein would take charge right after New Year's 2002. Wasserstein reportedly used some of the $650 million he had received from the September 2000 sale of Wasserstein Perella & Co., his investment bank, to Dresdner Bank to buy a substantial ownership stake from David-Weill. Under the terms of the deal, David-Weill would remain nonexecutive chairman of the holding company and retain the right to veto a sale of the firm; Wasserstein would run the business, much of whose profits were coming from Lazard Asset Management's hedge fund group in a very bleak year for deal making. In 2001 Lazard earned about $150 million, down from $450 million in 2000, sources say, with asset management probably kicking in about 90 percent of the earnings, the bulk of that from hedge funds.
Determined to reclaim Lazard's status as a preeminent investment bank, Wasserstein thought about spinning off the money management group through an IPO to raise capital, but in the end he didn't pursue the strategy.
He wasted no time in overhauling the investment banking group, forcibly yoking together Lazard's semiautonomous fiefdoms in London, New York and Paris. To inspire -- or compel -- the investment bankers to work together to land more big deals, he parceled out new equity stakes and expanded the number of partners from 130 to 160. In his first year on the job, he also spent about $50 million in signing bonuses, including a $36 million pay package to lure prominent Morgan Stanley deal maker Gary Parr to Lazard. (Parr's presence enabled Lazard to share with Morgan Stanley one of the biggest M&A deals of 2003: advising John Hancock
Financial Services on its $10 billion sale to Manulife Financial Corp., a Canadian insurer. Though the banking fees are undisclosed, Morgan Stanley and Lazard stand to share something like $30 million.)
In January 2003 Lazard introduced an equity program at LAM, doling out private shares that would only pay off if the group were sold or went public. But von Mueffling and his hedge fund brethren balked at their deals. During the first week of January 2003, von Mueffling walked into Eig's office and insisted that he and his half dozen hedge fund associates were entitled to a more meaningful ownership stake in Lazard Asset Management. Eig refused.
"I think Eig thought Lazard was bigger than von Mueffling and that the firm would carry on just fine with the rest of the team," says one former LAM staffer. "That was just a dead wrong assumption."
Within a few weeks of von Mueffling's departure, four members of the six-person hedge fund team had left Lazard. Portfolio managers Robert Cope and Tom Ellis, along with European marketing director Rupert Tyer, signed on with von Mueffling; portfolio manager Ben Guest quit but later joined his compatriots.
Eight months later $4 billion in hedge fund assets had dwindled to less than $800 million.
"What happened at LAM shows that even when a traditional money management firm is able to build a successful hedge fund business, the cultural and compensation issues can still come back to haunt you," says Robert Jaeger, who runs the hedge fund group at Evaluation Associates, a pension consulting firm in Norwalk, Connecticut.
The widely publicized turmoil at LAM has left institutional investors more than a little skittish about hiring the money manager. In addition to the hedge fund defections, Ronald Saba and Jim Shore, the two portfolio managers running $13 billion-in-assets Lazard International Equity Select, an active EAFE separate-account product sold through wrap channels, resigned in the summer of 2002. And in the past year, LAM has lost several veteran high-net-worth marketers. Among them: Theodore Gilman, who joined First Albany Cos, and Robert Hougie, who signed on with Barry Diller's IAC/InterActiveCorp.
Many pension fund officers are voting with their feet: Lazard has lost a string of institutional accounts in the past year. Among them are the $435 million El Paso [Texas] Firemen & Policemen's Pension Fund, which pulled two mandates worth a combined $80 million, and the $270 million Norwalk [Connecticut] City Employees' Pension System, which recently yanked a $20 million international equity account. "We gave them a couple of years to sort things out, but they just weren't getting sorted out," says Fred Gilden, the city of Norwalk's comptroller.
To signal LAM's basic strength and stability, in early October Eig announced the creation of a five-person LAM oversight committee. Its purpose, according to a letter from Eig to Lazard's clients: "to review and monitor all Lazard portfolios, ensuring adherence to mandates and expected patterns of performance."
LAM has lately scored a few small victories. In the past six months Reinsberg helped recruit a four-member global equity team from Deutsche Asset Management. Formerly at Zurich Scudder, the team, led by William Holzer and Nicholas Bratt, joined as directors and will manage a global equity portfolio. Between March 2003 and January 2004, LAM's assets grew from $50 billion to $69 billion. Those gains reflect the EAFE's 30 percent rise in 2003, as well as a string of new accounts in the U.K. and Australia.
Still, the money manager has made little progress on the hedge fund front. Industry insiders had expected LAM to fire back soon after the von Mueffling defection with a high-profile purchase or liftout of a hedge fund team. It hasn't happened yet, although last month Lazard hired Robert Rowland, a former Soros partner, to manage a European long-short strategy. It's a start. "It will be difficult, but there's no reason Lazard can't rebuild its hedge fund business," says Hilary Till, CEO of Premia Capital Management, a Chicago-based hedge fund consulting firm.
But it won't be easy to erase the widespread perception that Lazard Asset Management is a deeply troubled firm. Says one pension consultant, "There remains a lot of uncertainty about the future of LAM."
Not everyone is pessimistic, though. The firm's glory days are not so far gone and its core strengths, an expertise in international equity and a proven ability to run a hedge fund group, can be successfully exploited -- by the right leader. "They are hoping to rekindle things," says Manhattan executive recruiter Donald Dzurilla, who specializes in asset management. "You can't write Lazard off." In the next month or so, Wasserstein will likely name Eig's successor. Whether he will do more than preside over turmoil remains to be seen.