If there was ever a funds management merger which was handled badly – and there have been lots – then the worst in recent memory has surely to be that of BlackRock and Barclays Global Investors in Australia. The fallout continues with some new senior staff changes.
The head of Australian institutional sales, the 13-year BlackRock veteran Ravi Sriskandaraja,was shown the door a couple of weeks ago, followed by the head of marketing and former BGI stalwart Debbie Pearce. The new head of institutional business at BlackRock, to be announced soon, is former Ascalon chief operating officer, Jason Collins.
Justin Arter, a longtime Goldman Sachs executive who spent two-and-a-half years running VFMC, became CEO of the merged BlackRock Australia in May last year. He hired the CEO of Ascalon, Andrew Landman, last December as head of alternatives. Arter succeeded Damien Frawley as CEO of BlackRock, who had resigned to head up QIC a few months after the merger. Damien’s last few months at BlackRock were not happy ones.
But that is not what the bad handling is about. BlackRock, after all, is the biggest funds manager in the world, with about $US3.8 trillion under management. And senior staff come and go after mergers and acquisitions, usually through no fault of their own. This is what the bad handling is about:
BlackRock was a mid-sized American bond manager. It was not in the same league as PIMCO, say, which is the biggest in the world and reinvests heavily in its IP from the whiter-than-white head office in Newport, CA. BlackRock was started only in 1988 by Wall Street heavyweight Larry Fink, with the financial help of PE manager Blackstone.
BlackRock seized an opportunity, however, in 2009, to buy BGI, the only saleable business of the then-ailing Barclays Bank of England. BGI had its roots in Wells Fargo in the US, which the English bank acquired way back. BGI was arguably the best quantitative fund manager in the world. BGI had a distinctive culture, steeped not only in funds management tradition but also in academic tradition.
BlackRock, on the other hand, was a solid bond manager with aspirations in equities and, clearly, aspirations in what used to be the alluring world of global funds management.
But Australia was always a bit different. After acquiring the middle-ranking Merrill Lynch Investment Management, (MLIM)in 2006, there was a capable equities business in Australia – the fastest growing pensions market in the world, which we keep on saying. In 2007 BlackRock acquired a big hedge fund manager, Quellos Group, and tried to sell their capabilities in Australia, with limited success.
So, in 2009 BlackRock bought BGI. It was a bit like WalMart buying Harrods. Luckily for theBlackRockshareholders, in most parts of the world the deal made sense. Except Australia.
Merging the clever people at BGI with, dare I say it,the cowboys at what was Merrill Lynch Investment Management, which became BlackRock in Australia (you remember, this is a sharp Wall Street bond manager) would always be difficult.
So, what did BlackRock do? They attacked the problem like the US marines would do, without any regard for local heritage, even though they were buying a business whose management included people who were regarded as the cleverest in the world in their field.
Morry Waked, the well-regarded head of investments in Australia and also the global head of equities for BGI, was not impressed with the deal and the BlackRock attitude. He decided to call it quits and set up his own boutique. That is not uncommon when there’s a takeover.
But what was uncommon with this one is that a lot of other people at BGI in the Sydney office were similarly unimpressed with their new owners – these Wall Street bond managers with big aspirations who had, probably accidentally, bought MLIM and probably didn’t really know what to do with it.
So, Morry got a few of his friends together (we’ll get to who they are soon) and held a party. He used his card box to invite about 60-70 people from super funds and elsewhere to announce what he was doing, plus a few old colleagues.
The upshot was that a lot of these people wanted to invest with Morry. Why not? He had been the main man at BGI and he clearly knew his stuff. Why would these investors want to keep their equities management with a Wall Street bond manager? The word was out for several months beforehand that a new boutique was going to happen. Rumours swirled around Sydney that this boutique would start with at least $2 billion under management. It was HOT.
Morry partnered up with two former BGI Australia heads, Justin Wood and Bruce Goddard, plus one Richard Grinold, as shareholders. For the uninitiated, Richard Grinold, is the godfather of quantitative investing. For his credentials, see: http://money.cnn.com/magazines/fortune/fortune_archive/2003/06/16/344194/
Morry then offered a total of 85 per cent of the company’s equity, including his own shareholding, to former colleagues. These included BGI head of portfolio management Nick Burt, head of equity research Andrew Jackson and head of marketing Katherine Allchin. They then hired the former BGIhead sales person, Charlie Genocchio, who had left in 2008, plus some other former BGI staff.
Back to the party. BlackRock got wind of what was happening and someone in San Francisco or wherever at the old BGI or the new BlackRock – that Wall Street bond manager we’ve been speaking of – told Damien Frawley he had to sue Morry for theft of IP, passing off and anything else the lawyers could think of. Damien did not think this was a good idea but he did it anyway. He believes he had no choice.
Nearly a year of delayed action later, several Supreme Court hearings and, then at last a settlement, with Charlie Genocchio making notes of what was becoming the biggest pipeline in Australian funds management history, Vinva Investment Management got underway.
Vinva now has about $11 billion under management. Several of its funds closed within months of opening. Charlie and Katherine mainly do client service nowadays. The company has been an amazing success, thanks largely to the ineptitude of various people at BlackRock.
But BlackRock in Australia will be back. The biggest manager in the world will not lie down so easily. Hopefully, they will regret the way they treated their acquired staff at BGI and realize that investing is more about people than it is about money.