Separately Managed Accounts Power Plays
June 2, 2003
George Wilbanks is managing director in the investment management practice at Russell Reynolds Associates' New York headquarters. This is the inaugural edition of his new quarterly "Power Plays" column, in which he will discuss recruiting trends.
Hedge funds, funds of funds, leveraged finance, private equity, separately managed and venture capital investment companies are rapidly maturing into the main line of asset management - and are seeking talented sales, marketing, legal, accounting and operations executives to make sure they gain market share in this new expanded domain.
Alternative investments have become a key part of any sophisticated and fully diversified investment portfolio, and are no longer considered mere cocktail party conversation among the super wealthy, nor the sole venue of Wall Street and investment rock stars charting the path to acquiring their second jet.
With this rapidly developing acceptance by more traditional investors comes a new standard of transparency. Though this is familiar territory to any traditional SEC registered firm, it is often foreign to investment entrepreneurs in the alternative asset classes.
The investment processes used by these alternative investment firms to generate top returns in the industry are often significantly more sophisticated than their traditional "long only" counterparts. Building the infrastructure necessary to manage and communicate these activities to investors and their intermediaries (pension consultants, and potentially regulators) will require significant upgrading in all most major functions including distribution (sales, marketing and client service), finance and accounting, legal and compliance, technology and risk management.
At Russell Reynolds Associates, we are experiencing the beginning of this process through a significant surge in recruiting work from these alternative firms in all major business management functions outside investments. Typical search cycles start with a pension sales executive complemented by a client service professional. The next level usually includes an upgrade of the finance and legal functions at the firm.
As well, the requirements placed on the infrastructure by increasing complexity in reporting, risk management and client service usually lead to an upgrading of the technology team. Lastly, it is not uncommon several years into this cycle that one of the key members of the staff, usually the head of sales or the CFO, emerges as a chief operating officer or chief of staff, charged with the day-to-day management of the firm outside of the investment process. We are even seeing the first recruiting engagements to upgrade this COO role.
For us this is reminiscent of the late 1970s and early 1980s when a generation of hot stock pickers started the mutual fund and ERISA boom by plugging in the phones and turning on the lights at the firms that lead the traditional investment firms today.
The recruitment of sales and marketing professionals from the likes of IBM and the major trust and custody firms were first, followed by a wave of CFO searches. By the early 1990s, firms were focusing on chief technology officers and chief operating officers to bring a new level of quality and efficiency to their efforts. By the mid-1990s, these recruiting efforts extended into human resources, administration and risk management, all areas that are still active today.
We began to see this recruiting in the mid-1980's, and by the early 1990's it came to represent over one-half of our recruiting engagements, driving annual growth rates of over 30%.
At Russell Reynolds Associates we had numerous lengthy discussions in the mid-1980s wondering when the upgrading would start at the traditional separate account firms. Although the separate account industry did not begin to pick up steam until just under four years ago, since 1999, we at Russell Reynolds have been focused on the same developments with alternative investments. We have seen the very first marketing and sales searches as firms follow market leaders such as Bridgewater, Apax Partners, Andor Capital, Pareto Partners and PanAgora. We have a distinct sense of deja vu.
We believe the developments of the 1980s with traditional investment firms will be repeated among the majority of the alternative asset class firms in the coming decade.
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