When Pharos Capital Group L.L.C. (No. 5 on the BE Private Equity Firms list with $600 million in capital under management) acquired American Beacon Advisors Inc. (No. 1 on the BE Asset Managers list with $39.8 billion in assets under management) in 2008, it was a deal years in the making.
Pharos CEO Kneeland Youngblood was invited to serve on the mutual fund board for AMR Investments (formerly American Beacon) in the 1990s. He was immediately impressed with the track record of the division of Fort Worth, Texas-based AMR Corp., parent of American Airlines. Launched in 1986, AMR Investments initially managed pension assets for airline employees. However, after consistently beating its benchmarks, the decision was made to pursue outside clients and manage assets for mutual funds, pension funds, and short-term fixed income for former AMR units Sabre Holdings, an IT company, and airline caterer LSG Sky Chefs.
Pharos and its partners (which included private equity firm TPG Capital LP) closed the deal for $480 million, primarily in cash. Pharos became majority shareholder while TPG owns a minority stake and AMR Corp. retains an approximate 10% equity position. “Kneeland always had a dream that we could make this a company that he would be very involved in and become a minority-certified firm [that would] be the biggest and best in that bracket for the services that we provide,†says American Beacon Chairman William F. Quinn.
It certainly was a dream realized for Youngblood. He was planning the acquisition for years and after a false start, finally achieved his goal–an asset management firm that could be scaled up further than any
of its black-owned peers. However, there were surprises along the way. Among them, a meltdown in the financial markets that caused managed assets (and revenues) to plummet. But by focusing on new products, cherry-picking top fund managers, and bolstering sales and distribution, this be 100s newcomer not only overtook the No. 1 spot among be asset managers but has positioned itself to achieve Youngblood’s vision of creating the first African American-controlled $100 billion asset management firm.A Five-Year Mission
For Youngblood, the transaction was a triumphant conclusion to a courtship that lasted a half decade. “I had been pursuing conversations with the company, so when the opportunity presented itself, I was a known entity,†he says. “The management of American Beacon knew me and the senior management at AMR knew me. So that was an advantage.†Those relationships paid off in September 2008 when Pharos closed the deal.
Meeting that objective required patience and persistence. In 2003, AMR Corp., like other airline companies, had run into liquidity issues and problems with its labor unions. As a result, AMR Corp. looked to sell its money management business to generate some cash. Youngblood jumped at the opportunity. “When they put the company on the block, it looked like they would go into bankruptcy and the unions looked like they wouldn’t settle on a contract,†recalls Quinn. However, an agreement was reached and newly installed AMR Corp. CEO Gerard J. Arpey felt it made sense to keep the asset management business at that time.
Youngblood would not gain his next opportunity until 2008, when AMR Corp. hired Credit Suisse to sell the business,
which was renamed American Beacon Advisors Inc. amid pressure from shareholders to recognize the business’ value. At that time, the firm had grown to $65 billion in assets under management, of which American Airlines represented some $20 billion. “Pharos had a very competitive bid, but a number of people had very competitive bids,†recalls Quinn. “But we knew Kneeland very well and we felt that we could grow faster with him than we could have otherwise.†The minority designation was a factor and, unlike some of the competing bids, the transaction wasn’t subject to financing or market conditions.The firm’s investment strategy is simple and complicated at the same time. Rather than having a team of in-house fund managers, American Beacon employs a manager-of-managers approach where they cherry-pick fund professionals from various financial institutions based on their respective investment strategies and performances. “We try to pick the best managers in certain disciplines,†explains Youngblood, who sits on American Beacon’s board of directors. “We think it clamps down on the volatility and gives better returns over time. It’s about consistency rather than stellar returns one year and drastic losses the next.â€
Managing During a Financial Market Meltdown
Asset managers generate fees based on the dollar value of their holdings. In American Beacon’s case, this amounts to roughly one-third of 1%. When the financial markets are in turmoil and the stock market takes a nosedive as investors sell, assets managed by these firms–and those revenues–decline as well. And that’s exactly what happened in 2008 when the subprime mess wreaked havoc on the financial markets. The benchmark S&P 500 stood at 1,251.70 on September 12 of that year–the day the deal closed. By year-end, the index dropped more than 27% to 903.25.
As a result, American Beacon’s managed assets declined around 30%, from roughly $60 billion to $40 billion as money market assets flocked to Treasuries. “We were less profitable, but we still have to get back to where we were,†says Quinn. “You can’t cut costs because there are very little costs to cut. But we’ve got to grow the revenues, so we launched a program that did several things.†American Beacon had a reputation and track record but had an underdeveloped four-person sales force. The strategy was to apply additional resources to marketing its 12 multimanaged active funds, three index funds, and three single-manager products. So while most companies were scaling back, American Beacon was ramping up.
The firm increased its sales force to 15 external salespeople and four internal people who serve in a support capacity. American Beacon’s owners also hired a new CEO, Gene L. Needles Jr. Needles had been president of Touchstone Investments, part of Western & Southern Financial Group, a diversified group of financial services companies based in Cincinnati. “The strategy going forward was to apply additional resources to marketing a very attractive suite of investment products,†says Needles. “So the changes that have been implemented since I came on board were predominantly around that rather than a downturn in the market.â€
In addition to continuing to target institutional markets, the firm looked to expand into retail through partnerships with firms such as Merrill Lynch and Smith Barney (now Morgan Stanley Smith Barney L.L.C.). New products rolled out include American Beacon Global Real Estate Fund, introduced in March. All told, assets increased 22% in 2009 for the firm.
Among American Beacon’s overachievers was its large-cap value fund, AMR Class (AAGAX), which won the 2010 Lipper Fund Award for the Best Large Cap Value Funds category for the 10-year period ended Dec. 31, 2009. The fund beat out 185 funds for the award, returning 5.2% as of Dec. 31, 2009, while the S&P 500 returned 0.45%. “Consistency, low cost, attention to detail are the real value propositions we bring to clients and we’re able to take a lot of their workload off of them and their investment committees because of what we do,†says Needles. “We may not have had some of those high highs as some of those single managers but we didn’t give up as much as they might have in certain markets.â€
Morningstar agrees. “They’re really looking for highly reputable, skilled managers that have a repeatable process and don’t have a lot of volatility in their funds,†says Ryan Leggio, an analyst for the mutual fund tracker. Leggio points out that nearly all American Beacon’s funds earned an above-average Morningstar rating of three or four stars. “It’s a fine firm that’s very conservatively managed and has done very well for shareholders.â€
Even with the market turbulence, Youngblood has no regrets about closing the deal. “We purchased the asset at the top of the market, so the timing could have been better,†he says. “But we never looked at this as a quick flip.†Just like the firm’s investment approach, Youngblood is in it for the long haul.