TIAA revealed plans to shut down its outsourced-CIO (OCIO) business about two weeks ago — a “jaw dropping” move that has left staff and clients reeling, according to industry insiders.
The unit controls about $3.2 billion for seven clients and employs about 30 people, all of whom are affected by the closure, two sources said.
Clients are primarily nonprofits that entrusted TIAA to manage their assets indefinitely, taking the place of an in-house investment team or board that would otherwise make portfolio decisions. Hiring an outsourced CIO takes months, at a minimum, and losing their handpicked OCIO leaves these nonprofits in the lurch.
For example, the Medical College of Georgia Foundation hired TIAA last August, after a request-for-proposals process and bilateral site visits. The nonprofit “had a really rigorous search process,” Kevin O’Leary, CEO of the OCIO unit, said at the time. “You could tell they put a lot of care and effort into it.”
Institutions like the Medical College of Georgia “are now going to have to do a search on their own, or a search for a search consultant, and go through this process again,” said Dennis Sugino, an advisor on OCIO relationships. He spoke by phone Monday, en route to Mississippi to help an institutional client review its outsourcer. “They probably didn’t have that in mind. It’s a material burden, and clients have a reason to be unhappy about it.”
[II Deep Dive: The Outsource-CIO Earthquake]
TIAA said it will take “a phased approach” to exiting the business over the next nine to 12 months “to facilitate a smooth transition for its current OCIO clients, and will continue to deliver on its fiduciary obligations to these clients through the end of the fiscal year, or longer, if needed,” according to a spokesperson. “Additionally, the organization is committed to working with current OCIO clients to identify and facilitate their transition to new providers that meet their needs.”
The firm said in a statement that it had determined that it could best serve the investment needs of future endowment and foundation clients through its Nuveen subsidiary, a decision that prompted the firm to exit “the increasingly crowded and highly competitive OCIO business.”
Many employees on the OCIO team have been left hanging by this protracted wind-down, a TIAA staffer told Institutional Investor Monday, speaking anonymously. All are expected to lose their current jobs, and a portion will leave in January. “But some have to be here until they turn off the lights — might be six, 12, or 18 months.”
“People are shocked and disappointed. For the people who’d been here since day one, this was their baby,” the staffer said, adding that TIAA’s severance package offers had been fair. “Everyone’s looking for new opportunities, internally or externally, and some have been caught flat-footed.” Much of the team is based in Houston, where the meager local asset management options mean they’re “scrambling to find roles.”
Adding to the internal dismay is the fact that TIAA rebranded the OCIO business about 18 months ago, and finally provided the sales and marketing resources that it needed to succeed, according to the staffer.
“Since the rebranding, the pipeline [of prospective clients] doubled, and everything was signaling that things were changing. Performance has always been really good. We were in live searches. We had business coming in,” the person said. “It takes two to three years to really make a turnaround take off. If we did back in 2011 what we did in the last 18 months, we’d be a market leader.” The business still could be, the employee believes, if TIAA’s executives would stick it out. “I think they were impatient.”
OCIO experts outside of the firm likewise believe that TIAA had what it takes to excel in a cutthroat industry, but that poor early momentum put the business on the chopping block.
“We thought they were going to be a powerhouse,” said Jim Scheinberg of North Pier Search Consulting, which helps institutions pick OCIO providers. “Given enough time, they may have actually pulled it off. But why didn’t they gain more critical mass sooner?”
The unit had been adding only about one or two clients per year, the staffer said. Recent additions took the news of the closure especially hard. In that position, “anyone would be angry.”