Capital Allocators – Inside the Institutional Investment Industry
Episode: Asset Management Consolidation - Simon Krinsky, Hall Capital and Tim McCusker, NEPC (EP.421)
Release Date: December 9, 2024
Host: Ted Seides

Introduction

In Episode 421 of Capital Allocators, host Ted Seides delves into the significant trend of consolidation within the asset management industry. He is joined by two seasoned leaders, Simon Krinsky, Managing Partner at Hall Capital, and Tim McCusker, Chief Investment Officer at NEPC, who have recently overseen major mergers in their respective firms. This episode provides an in-depth exploration of the motivations, processes, and implications of these consolidations from the perspectives of both firms.

The Landscape of Asset Management Consolidation

Ted Seides sets the stage by highlighting how consolidation is a hallmark of mature industries, offering benefits like economies of scale, enhanced product offerings, and broader services to meet evolving client demands. He notes the increasing merger activity impacting both asset managers and allocators, underscoring its significance as a defining trend in recent years.

Ted Seides [04:18]: "Consolidation in asset management is one of the industry's most important trends."

Guest Introductions and Firm Overviews

Simon Krinsky - Hall Capital Merger with Pathstone: Simon Krinsky discusses Hall Capital's strategic merger with Pathstone, combining Hall's $45 billion in assets with Pathstone's $100 billion. This merger aims to leverage shared strengths to better serve clients and expand market reach.

Tim McCusker - NEPC Sale to HighTower Holdings: Tim McCusker details NEPC's recent sale of a majority stake to HighTower Holdings, integrating NEPC's $1.8 trillion assets under advisement with HighTower's $130 billion in assets under management. This move positions NEPC to capitalize on HighTower's expansive platform and resources.

Rationale Behind the Mergers

Growth and Market Dynamics: Both Simon and Tim emphasize the critical need for growth to continue delivering value to clients. They discuss how organic growth has its limitations, necessitating strategic mergers to achieve scalability and access new markets.

Tim McCusker [10:05]: "Growth at our firm has always started with growth opportunities for our people."

Expansion into New Channels: Simon highlights the opportunity presented by the growing Registered Investment Advisor (RIA) space, which lacks the robust investment engines of larger institutional consulting firms. The merger with Pathstone allows Hall Capital to tap into this expanding market effectively.

Simon Krinsky [08:05]: "RIAs needing a lot of investment help and these platforms that have been created really maybe don't have that full investment engine... there's a nice fit with the skills and strengths that we have."

The Merger Process: From Initiation to Execution

Initiation Phase: Both leaders recount the initial moments that led to their firms considering mergers. Simon refers to a strategic planning exercise post-COVID, while Tim describes a pivotal conversation with a mentor during the pandemic that set the wheels in motion.

Tim McCusker [12:52]: "I went on a walk with a mentor... and said, Bill, I've been doing this for a long time. Just help me think about what's the right direction for the business."

Selection of Partners: Simon and Tim discuss how they navigated the selection of suitable partners, emphasizing the importance of cultural and strategic alignment. Simon shared his firm's extensive meetings and evaluations to ensure Pathstone was the right fit.

Simon Krinsky [16:32]: "We look for cultural alignment and strategic alignment. We wanted to stay well aligned with that core business and our DNA of serving clients."

Dealing with Challenges: Both leaders acknowledge the hurdles faced during the merger process, including managing rumors, maintaining confidentiality, and securing partner buy-in. Simon notes the importance of external advisors in keeping the team focused.

Simon Krinsky [29:56]: "There was a moment where there was a rumor out there that we were being bought by one of our competitors... Having an external advisor was incredibly helpful."

Cultural Fit and Integration

Ensuring Cultural Compatibility: A significant focus of the discussion centers on maintaining cultural integrity post-merger. Simon emphasizes sharing ownership and maintaining client-centric values as non-negotiables in their merger with Pathstone.

Simon Krinsky [20:30]: "A really important part of our culture is having ownership in our business... if they wanted to go 100%, that was a deal killer."

Tim echoes the importance of cultural alignment, highlighting shared values and leadership dynamics as key factors in NEPC's integration with HighTower.

Tim McCusker [21:44]: "We have wonderful relationships. We want to integrate with HighTower and our investment team will lead the research effort for the combined organization."

Integration Plans: Simon describes Hall Capital's approach to integrating with Pathstone, ensuring that existing operations remain unaffected while exploring new opportunities within the combined entity.

Simon Krinsky [24:16]: "There is no disruption to our day-to-day activities for our different business lines... we put next to it trying to build solutions for the advisors."

Tim outlines NEPC's integration strategy, focusing on gradual collaboration and leveraging HighTower's infrastructure to enhance service offerings.

Tim McCusker [53:51]: "The first hundred days starts on Monday... we have a boot camp for services in early January and intentional events to foster integration."

Client and Employee Reactions

Client Reactions: Both leaders discuss the varied responses from their clients upon announcing the mergers. Simon notes that longstanding clients largely trust the decision, while newer clients sometimes feel disappointed due to lack of initial transparency.

Simon Krinsky [35:21]: "We have clients who are excited for the new opportunity... and others who are naturally more skeptical."

Tim highlights the initial skepticism regarding private equity involvement but observes that clients gradually understand the growth-focused intentions behind the mergers.

Tim McCusker [40:03]: "When clients stop and think about how capital is required to innovate... they come around to it."

Employee Reactions: Simon and Tim both address how their teams have responded, emphasizing open communication and personalized engagement to navigate anxieties and uncertainties.

Simon Krinsky [41:38]: "We had almost bi-weekly calls with our partners, updating them and helping them feel part of the process."

Tim McCusker [42:29]: "We handle everything with one and a half employees per client, solving problems as they come through individual conversations."

Personal Impact and Ownership Structures

Economic Implications: Tim explains the unique ownership structure at NEPC, where equity is widely distributed among employees and clients, ensuring that the merger benefits the entire organization without concentrating ownership in the hands of a few.

Tim McCusker [50:21]: "Every single owner... are rolling the same percentage of our equity into Pathstone stock and receiving some cash."

Simon shares a similar sentiment, detailing how Hall Capital’s LLC model ensures that ownership remains distributed and reward systems are adjusted to honor long-term contributions.

Simon Krinsky [52:08]: "We have longevity matters a lot... carved out some of the proceeds and have put some longer-term retention bonuses in place."

Integration and First 100 Days

Tim’s Integration Blueprint: Tim outlines NEPC's first 100 days post-merger, focusing on social integration events, strategic meetings, and cultural assimilation activities to foster unity and collaboration.

Tim McCusker [53:51]: "The first hundred days starts on Monday... meet and greet, boot camp for services, and our 15th anniversary party in Florida."

Simon’s Strategy for Hall Capital: Simon describes Hall Capital's approach, which centers on understanding the needs of RIA clients within Pathstone's platform and offering tailored investment solutions without disrupting existing services.

Simon Krinsky [55:17]: "We're having calls with those advisors to understand where they might have gaps in their portfolio and how we can help."

Future Outlook and Industry Implications

Evolving Manager Relationships: Both guests discuss how their research platforms will adapt to accommodate the diversified manager relationships post-merger, emphasizing the importance of maintaining robust research capabilities to serve a broader client base.

Simon Krinsky [56:59]: "Our goal is going to be to bring them new things that aren't in their portfolios... we do have to figure out when they want to look at new ideas."

Tim McCusker [59:05]: "The art is going to be over probably a two or three-year period integrating our research with a clear objective of having one research engine."

Future Transactions: Looking ahead, both Simon and Tim acknowledge the possibility of future mergers or acquisitions, driven by private equity interests aiming to scale and innovate within the asset management space.

Tim McCusker [60:15]: "I expect that there will be more than one transaction at the private equity sponsor level... adding strategic partners who believe in what we're doing."

Simon Krinsky [61:20]: "Predicting it right now is foolish because we just don't know how that world will evolve... but we'll continue to serve our clients really well."

Key Takeaways and Insights

• Strategic Growth through Consolidation: Both firms leveraged mergers to achieve scalability, access new markets, and enhance service offerings, underscoring consolidation as a strategic growth tool in mature industries.

• Cultural Alignment is Crucial: Ensuring cultural compatibility is paramount to the success of mergers, requiring thorough evaluation and genuine alignment of values and business philosophies.

• Transparent Communication: Effective communication with clients and employees is essential to manage expectations, alleviate concerns, and foster trust during the transition period.

• Long-Term Vision: Both Hall Capital and NEPC view their mergers not as short-term cost-cutting measures but as long-term investments aimed at sustaining growth and delivering enhanced value to clients.

• Future-Proofing: Leaders anticipate ongoing consolidation driven by private equity and evolving industry dynamics, highlighting the need for adaptability and strategic foresight.

Conclusion

Ted Seides wraps up the episode by reflecting on the insightful discussions with Simon Krinsky and Tim McCusker, emphasizing the intricate balance between strategic growth and cultural preservation in successful mergers. The episode serves as a valuable resource for understanding the dynamics of asset management consolidation and offers actionable insights for leaders navigating similar paths.

Ted Seides [65:06]: "Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings and signs. Have a good one and see you next time."

This episode of Capital Allocators provides a comprehensive look into the strategic considerations, challenges, and outcomes of major mergers in the asset management industry, offering listeners valuable lessons on navigating consolidation with an eye towards sustained growth and client-centric service.