Babson Capital immediately springs to mind for institutional investors around the world seeking global fixed-income managers, but that is a key goal for CEO Tom Finke. Having raised $5bn (€3.9bn) from European investors alone in 2013 it certainly looks well-positioned to one day be ranked among the market leaders.
The firm, with its subsidiaries, real estate manager Cornerstone Real Estate Advisers and specialist real asset manager Wood Creek Capital Management, currently manages just over $200bn, split around half-and-half between MassMutual Life Insurance and third-party investors – one-third of which originates from Europe.
That Finke’s ambition is realistic is a testament to the success of a business strategy that has morphed what was originally a Boston-based US equity value manager into a fixed-income manager based in Charlotte, North Carolina.
Finke himself exudes a gentle conviviality that epitomises the team-based philosophy of a firm that eschews a star culture. Can he and his colleagues develop their capabilities and brand to compete on an equal footing with the already well-established global fixed-income players in Europe and elsewhere outside the US?
Babson’s transformation arose through three key developments. Firstly, there was the acquisition of Boston based US equity manager David L Babson & Co in 1995 by MassMutual, with a transfer of investment staff from MassMutual in 2000 to form Babson Capital.
Secondly, came the 2002 purchase from Charlotte-based Wachovia Bank (now part of Wells Fargo) of US bank loan specialist First Union Institutional Debt Management – which Finke had co-founded.
And lastly, was the acquisition in 2002 of the CLO activities of London’s Duke Street Capital, which gave Babson an immediate European presence in leveraged loans.
• 2008: Chairman and CEO, Babson Capital Management
• 2008-2011: Executive vice-president and CIO, MassMutual Life Insurance Co
• 2007-2008: President, Babson Capital Management
• 2002-2008: Managing director, Babson Capital Management
• 1998-2002: President, First Union Institutional Debt Management
• 1994-1997: Vice-president, high yield sales and trading, Bear Stearns
• 1991-1994: Assistant vice-president, loan syndication desk, Mellon Bank
• 1988-1989: International banking officer, Westpac
• 1986-1988: Associate, First Union National Bank
Babson Capital Management
• AUM: $205bn (30 June 2014)
• Global high yield: 41%
• Investment grade: 34%
• Real estate: 12%
• Structured credit: 8%
• Equity: 2%
• Real assets: 2%
• Mid-market finance: 1%
• Emerging markets: <1%
The stable source of revenue from the management of MassMutual funds means that Babson has the luxury of being confident it can weather downturns.
“Most of our money is very sticky and has to be invested through the cycle,” says Finke. “Insurance companies can’t go into cash just because they don’t like the spreads. We are very good at fundamental team-driven investing and we tend to perform the best through a down cycle.”
Even more powerfully, the integration of these businesses resulted in capabilities in liquid and illiquid investment and high-yield credit across a spectrum of opportunities globally. For Finke, business strategy has been driven by the increasingly global nature of investment, which has meant that the firm has had to have capabilities in Europe and the Asia Pacific region alongside the US.
“Our US and European loan desks have been working together for years,” Finke explains. “We launched our first global loan strategy in 2006 and we believe we have a first-mover advantage in being able to offer such global structured products. Our objective in Europe, as it is in the US, is to invest across the spectrum of high-yield bonds, leveraged loans and direct middle market lending. Clients want managers who can move fluidly between markets.”
That has meant that the firm had to be able to deliver global investment strategies but remain focused on its core expertise in fixed-income, and in real estate through Cornerstone.
The key gap that had existed was the lack of an emerging market debt capability. Babson tackled that by making two key hires in 2013 – of emerging markets specialists Ricardo Adrogue in Boston and Brigitte Posch in London. By mid-2014 Babson had built a 13-strong team with Adrogue overseeing portfolio management activities for sovereign and local currency strategies and Posch leading portfolio management activities for all emerging market corporate debt strategies.
Babson’s growth of capabilities does bring new challenges. The firm’s reputation had been in structured debt – and it remains one of the biggest CLO investors in the world. As a result, its main competitors so far have not been the major traditional fixed-income players, such as the insurance company-owned fund management firms but, rather, alternative investors such as Carlyle and Apollo.
“Apollo has focused on private equity, credit and real estate very successfully for 20 years,” says Finke. “We see ourselves as having a similar focused approach on fixed-income, credit and real estate.”
Developing a multi-asset global debt capability pits Babson head-to-head with a much bigger set of competitors. But in this competition, the fact that the global fixed-income markets are themselves undergoing such rapid changes, and opening up to newer entrants with niche skills, potentially works to Babson’s advantage.
“One of our core strengths is investing in illiquid markets – we do direct lending and mezzanine not only in the US but also Europe and the Asia-Pacific region,” says Finke. “Similarly, we see ourselves as developing the capacity to invest in less liquid, more direct markets in emerging countries, but it will take time.”
Direct lending to small and medium-sized enterprises (SMEs) is an area of growth for Babson but it also raises new challenges.
“The nature of credit, especially lending to SMEs, is that you need to be in the market near the borrower, to be able to undertake due diligence and understand the nature of potential losses,” Finke reasons. “You can’t sit in an office in New York or Charlotte and understand SME lending in China. You need to create partnerships and boots on the ground to get things done.”
He is realistic about the timescales. “We are ready to look at new opportunities in China and elsewhere, but the question is, are we ready to invest in them?” he says. “We need to develop our expertise on a step-by-step basis, even if it takes us 10 years before we are a major lender to SMEs there.”
But judging by his progress so far in developing emerging markets capabilities, it may be far sooner than that.