Strategically speaking: Neuberger Berman
This year is a milestone for Neuberger Berman. It marks the 10th anniversary of the re-emergence of the firm as an independent, employee-owned in-vestment manager, as well as the 80th anniversary of its founding.
With assets under management of $313bn (€273bn, as at the end of December 2018), Neuberger Berman is a mid-sized investment manager. What differentiates it, says Joe Amato, its president and CIO of equities, is that its capabilities span both public and private markets.
Along with $140bn in fixed income and $90bn in listed equity strategies, the firm also manages $83bn in alternatives, mainly private equity. These enable it to create solutions which exploit valuation and risk trade-offs between public and private markets. Its ability to exploit illiquidity premiums in private markets becomes a competitive advantage in a world of low returns, says Amato.
It can also benefit from the bifurcation of the investment industry between mega-firms offering passive products and small high alpha boutiques. Many mid-sized active managers are being squeezed but Neuberger Berman claims its approach gives it a strategic resilience that few mid-sized firms can emulate.
Amato was one of the team that led the management buy-out of the firm from the ruins of Lehman Brothers in May 2009. The origins of Neuberger Berman firm go back to 1939 when it was set up as a US-focused investment manager with a high-net-worth client base. In 1999, it went public. A few years later, in 2003, it was acquired by Lehman Brothers along with other businesses including Lincoln Capital based in Chicago and a Dallas-based private equity firm. All three became units of Lehman Brothers Investment Management.
In September 2008, Lehman Brothers famously declared bankruptcy in a move widely seen as a trigger for the global financial crisis. Within weeks there was a public announcement of a private equity bid for Neuberger Berman. But as the markets continued to deteriorate and credit markets tightened, that bid became more and more tenuous. The management, led by current chairman and CEO George Walker, then structured a buyout with employees owning 51% and the Lehman estate issuing preference shares to own 49%. The preferred shares were subsequently bought out by management, enabling the firm to become 100% employee-owned. It now has 2,000 employees and 500 shareholders.
Many privately-owned fund managers struggle with generational change with founders often owning most of the shares. The Neuberger Berman management, says Amato, was keen to learn from its peer group to establish a robust ownership structure that could ensure transfer of ownership through future generations of management.
They did this by first ensuring that initial equity was spread widely throughout the management with 225 initial shareholders in 2009 that has now more than doubled in number.
Second, by ensuring that the firm’s equity can be transferred to a new generation of management through sales of shares at a price set annually by an independent valuation agent.
Neuberger Berman now has capabilities across a comprehensive range of asset classes through a series of team acquisitions. Amato bristles at the idea that the firm is a multi-boutique. He takes this label to imply total independence and a lack of any coordination or benefit through being part of a larger overall organisation. By contrast, Neuberger Berman is an integrated firm. “I see tremendous benefits – culturally, in the investment ecosystem we have,” he says. “It enables investment staff to leverage things like central research capabilities, data science investments, ESG and the ability to gain direct access to companies and in our approach to governance with relation to companies we invest in.”
The sheer diversity of Neuberger Berman’s capabilities is both puzzling and surprising. What it reflects, says Amato, is a combination of client demand and having the appropriate high-calibre in-house teams in place. To acquire new capabilities, though, is not an easy task. Emerging market debt, for example, is a large asset category that Neuberger Berman did not have much of a presence in, yet it is a core component of any firm aspiring to provide a global fixed-income capability. “We lifted a team from ING in the first half of 2013, but we first started the search process in 2011,” Amato says.
He sees two main gaps in the firm’s capabilities. While it has a quant-driven global equity strategy and offers US, developed markets ex-US and emerging market equity strategies, it does not have a fundamentally managed global equity strategy. The other significant gap he sees as private real estate – investing in the equity of or lending capital to developers, owners of primarily commercial real estate.
The firm’s business strategy is clearly to follow the wider industry flows and fancies. With ESG, for example, Amato says: “We want to have a very large proportion of our assets to be managed by teams that incorporate ESG factors into their investment process. Ideally, that should be 100%.” That does not, though, mean ESG-focused funds, although the firm has $6bn of dedicated ESG strategies.
What gives stability to Neuberger Berman as a business is the diversity of its product range. This should enable it to withstand the headwinds in long-only active equities while taking advantage of industry inflows into fixed income and alternatives. “We don’t have to be in every investment category,” Amato says. “If we believe we can deliver good outcomes with excellent investment capability, then we will be there.”
If Neuberger Berman’s diversification makes it relatively immune to dramatic outflows from any single asset class risk, what does Amato fear most? “I worry most about one bad-apple employee out of 2,000 that does something bad that harms our clients. One person doing something dumb, or illegal can really damage your reputation.” The only effective way of protection against that is having the right culture within the firm. “It doesn’t guarantee you don’t have problems. But if you are sitting next to someone doing something you think is inappropriate, you raise it. That reputation for integrity takes generations to build up.” For a firm founded 80 years ago that itself may be a competitive advantage.
This article has been amended to correct the year Neuberger conducted the emerging market debt team lift from ING