Q&A: Allowing Money Managers Equity - and a Free Hand

When it comes to the investment management business, William J. Nutt, the chief executive of Affiliated Managers Group, has his bases covered.

After resigning as president of the Boston Co. in 1993, Mr. Nutt bought two of its subsidiaries - Boston Institutional Services and Funds Distributor Inc.

That same year, he set up Affiliated Managers Group, a holding company with six investment management firms that together have $15 billion under management. NationsBank Corp. has a small stake in the privately held firm.

The group has an unusual approach to building its business. It acquires between 55% and 70% of the equity of an investment management firm, leaving the remaining 30% to 45% with the money managers themselves.

Mr. Nutt, 50, believes that managements of the acquired firms should be left to their own devices, and he mandates no decisions.

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Why have you decided to let the firms you purchase remain relatively independent?

NUTT: Firms that are both independent and have a material part of their equity owned by the management seem to do a better job for their clients.

What we do is to look at firms that ... have their ownership concentrated among ... founders who look to get some liquidity or ... (to get) the equity that they hold into a younger generation of management.

How do these independent firms run their business without help from a parent?

NUTT: We continue to leave them alone in terms of their investment process and operating expenses -- they make those decisions themselves.

We will help them with the distribution process. I will tell you, we do it only when they request us to. We don't go to them and say, "We think that you should do this," because that's exactly what a bank would do and we want to be distinguished from that.

We do not promise them that we will bring any level of assets. What we bring is the expertise to help them develop it on their own.

NationsBank holds a stake in your company. Is partial ownership a feasible way for other banks to enter money management?

NUTT: Absolutely. Banks are an important distribution channel and some of the leading-edge banks realize that they cannot or don't wish to manufacture all of the asset management products that their clients need.

The smartest banks have recognized that no one can do that, no matter how good they are. There will always be a need for external managers.

Since those clients know they can get them from somewhere else, the clients will find them. Better for a bank to have external managers than to lose the client entirely.

Why have banks had trouble retaining money managers that come with acquired firms?

NUTT: Basically, these are businesses that seem to do better when there is direct equity participation, and most banks are unwilling to have even a small percentage of the equity owned by the managers.

So, a money manager's unhappiness with bank ownership may lead to opportunities for you?

NUTT: Yes. That's why you see a number of opportunities arise that can be called lift-outs. Those come about where you have bank that going through a merger and they have two institutional asset management divisions and its not likely that they need both. One of them is going to either be disposed of or merged with (the other) and that's probably not in the best interest of the clients or employees to have that happen.

What if somebody at an investment management firm within a bank approached you without telling the bank?

NUTT: We would tell them that we would only perform the "lift-out" on a friendly basis and say, "we would like you to think this through (and decide) whether this is really in your own best interest."

Then we will go to the bank itself and say, "would you like to consider such a transaction?" Remember, often in these circumstances, the management has decided to leave anyway.

What if the bank says no go?

NUTT: Well, I hope that most banks are responsive to what the client really wants. Ultimately, if the client says, "This is in the best interest of the money management people who are serving me," then the money manager is going to win.

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