At a recent breakfast for a newly returned diplomat from an
emerging markets posting, an observation was made about the utter imperative of
succession planning. Virtually every organization across the globe—countries,
companies, dynasties—make succession planning part and parcel of everyday
strategy. But, the diplomat said, many third-world politicians were not as attentive
to it as the common good required, except perhaps in the breach.
Add to them, I thought silently to myself, asset managers.
Starting and establishing an asset management firm is a celestial achievement these days, with regulatory requirements at a fever pitch and capital-raising a gamble that the Forty-Niners might have shrunk from. Actually, it was ever thus. For every Brinson and Bridgewater, a torrent of attempts fell short, remembered by no one. Ours is an industry sharp of tooth and red of claw.
Why is proactive succession planning so rare in our industry? For one, running an asset management firm is quite fun. A successful asset management start-up requires a founder of prodigious talent. Our entrepreneur has to burn the boats, and find like-minded individuals willing to take risk (a rarity). The founder must navigate hyper-compliance and investors who prefer the IBM option to any alternative that might get them fired. He or she must hope and pray that the chosen asset class stays in favor, and stay the course. There will be payrolls met by a penny, shouting matches over the trading desk, wounded feelings, firings, and more shouting matches. And then assets breach the one billion mark, and then five and then ten. New problems emerge, but the hardest part of the race, by far, has been run. That is, for those lucky few.
Why ever sell these few asset management businesses that cross the magical threshold? I am a great admirer of Gary Brinson—most anyone would be who watched Brinson Partners seize the moment in the 1990s. But it was hard to fathom why he sold his business to Swiss Bank Corporation in 1994: Surely not just for more money?
These are businesses—not practices. When Brinson Partners changed hands, it might have been the ongoing expression of its founder’s investment genius. It would have wobbled but hardly imploded had Brinson decided to focus on raising koi, not returns. But he entrusted his firm’s fate to Swiss Bank Corporation, which shortly thereafter found itself in the clutches of UBS, and then the firm lost its way as the Swiss screwed the pooch. (Nothing against the Swiss: Americans, French, Britons, Canadians, or Germans could have done the same.)
Bridgewater, too, derives its success from its founder’s
worldview. But almost unique among its peers, one senses that the Westport, CT-based
firm—and 66-year-old founder Ray Dalio—have been grappling with the succession issue
for some time. Bridgewater has found creative ways of getting stock into
employees’ hands, and various executives have been floated as potential heirs
to Dalio. Steve Jobs’ confrere Jon Rubinstein is the most recent, and
intriguing inheritor apparent. The national press gleefully reports these
succession moves. (Particular mention goes to the New York Times, which treats leaks from Bridgewater with the same
salaciousness that it dissects the Republican National Committee.) But in
reality, these maneuvers are simply a function of the firm’s Darwinian culture.
Bridgewater is grasping a nettle—succession—that most other firms fail to clutch.
Why is this so rare in our industry? For one, running an asset management firm is quite fun. And it’s not that hard when the going is good. When all else is failing—eyesight, libido, Achilles Heels—being captain of the ship appeals greatly. And if the end is in sight—an 80-year old CEO is a stretch even for maniacal egos—well then, sell the firm. And not to fellow workers, as they’ll likely want to pay less or more gradually than outsiders. The hard truth is that even successful founders are all too human, and typically opt for the easy—and wrong—solution.
Institutional investors should be betting on firms, not individuals. Perhaps some still hand money to Bridgewater because they think Dalio is a genius, but the wisest do so because they believe the institution will deliver what it promises them. Dalio—at least from a distance—seems determined to ensure that Bridgewater will survive him, and take with it into the foreseeable future the culture he created. That is his singularity.
The industry would do well to emulate him.
Charlie Ruffel founded CIO. He is now co-CEO of Kudu Investment Management (KIM), based in New York City. KIM takes minority stakes in asset management firms.