Tuesday , December 11, 2018

Charlotte-Invested; A World of Opportunity

Charlotte-Invested; A World of Opportunity

“We knew we had a really good team and an opportunity to grow,” says Babson Capital Management CEO Tom Finke, on moving from being bank-owned to insurance company-owned. Today, Babson has over $220 billion in assets under management, about half of which represent MassMutual’s general investment account, and offers global investment solutions. Headquartered in Charlotte, Finke comments, “It became clear this is where a lot of our growth has been and will be.”

 More Than Investing… Invested

 For Babson Capital Management, It’s a World of Opportunity

One of the less frequently recognized financial behemoths in Charlotte is Babson Capital Management (Babson). As one of the world’s leading asset management firms, with investment teams on four continents managing more than $220 billion in assets, Babson works with clients in countries across the globe.

The company offers expertise in a wide variety of traditional and alternative asset classes, including global high yield loans, structured credit, private debt, and real estate. Clients include both institutional and wealth advisory clients.

While Babson began in New England, the company is now headquartered in Charlotte and its presence will soon punctuate the Charlotte skyline with a towering office building providing penthouse views.

North Carolina’s increases are among the highest for the 37 states that rely on the Healthcare.gov website, according to government figures.

CEO Tom Finke’s ambition is to make Babson top-of-mind for institutional investors around the world seeking global fixed-income managers.

A Force to Be Reckoned With

Babson Capital traces its roots back 75 years to the creation of David L. Babson & Co., a Boston-based value equity firm and pioneer in growth stock investing. The firm grew steadily into a highly regarded investment manager, and was acquired by Massachusetts Mutual Life Insurance Company (MassMutual) in 1995.

In 2000, David L. Babson & Co. was integrated with MassMutual’s Investment Division, uniting two firms under a shared dedication to unwavering client service and long-term, fundamental investing.

The combined entity refined its expertise across both public and private asset classes by managing investment portfolios on behalf of the parent company MassMutual as well as a growing base of institutional investors.

The firm continued to grow both organically and through a series of strategic acquisitions, with two in particular significantly adding to the investment management platform: First Union Institutional Debt Management, an experienced leveraged loan and CLO manager in the U.S., Duke Street Capital Debt Management, one of the largest bank loan managers in Europe. These acquisitions solidified Babson’s presence in the world’s two largest high yield markets, and the firm was rebranded as Babson Capital Management in 2004.

With proficiency across the fixed income spectrum, Babson has continued to expand its investment capabilities over the last decade. To serve the needs of an increasingly global client base, Babson further extended its offerings in private finance, private equity and emerging markets.

Today, Babson offers a wide range of investment solutions to a client base that spans the globe. Throughout its growth, the firm has maintained a strict adherence to the bottom-up, fundamental analysis that has long been the hallmark of Babson’s investment process, and fostered a corporate culture that thrives on teamwork and collaboration.

Babson is part of the MassMutual Financial Group, which includes Baring Asset Management and Oppenheimer Funds. Babson also has two wholly owned asset management subsidiaries: Cornerstone Real Estate Advisers and Wood Creek Capital Management.

Charlotte Figures Prominently

Babson opened their first Charlotte office in 2002 when Wachovia sold First Union Institutional Debt Management (IDM), a 13-person boutique high yield loan manager specializing in leveraged loans and collateralized loan obligations (CLO). One of the co-founders of that Charlotte company was Thomas M. Finke.

A Pittsburgh native, Finke received his MBA from Duke University’s Fuqua School of Business in 1991, after earning his undergraduate degree from the University of Virginia’s McIntire School of Commerce. Prior to forming IDM, he held positions in high yield and loan syndications at First Union Capital Markets, Bear Stearns and Company, and Mellon Bank. But in the wake of the 2000-2001 recession, and after the merger of First Union and Wachovia in 2001, Finke decided he needed to find a permanent home for IDM.

“We knew we had a really good team and an opportunity to grow,” says Finke. “Babson offered an opportunity to move from being bank-owned to insurance company-owned. Not only did they want us as an asset manager, but MassMutual’s general account invested in leveraged loans, and they wanted a team dedicated to that. Part of the deal was we got to stay in Charlotte.”

Over the next several years Finke’s responsibilities at Babson grew, and in 2008, he assumed the role of chairman and CEO. The core management team being assembled in the Charlotte office included long-time business partner Russell Morrison, who was with Finke at First Union and who now serves as vice chairman and oversees Babson’s global fixed income and global private credit businesses.

In addition to Finke and Morrison, the team includes company 35-year MassMutual veteran Cliff Noreen, president; Anthony Sciacca, the head of global business development who also oversees private equity investments; Paul Thompson, the COO, CFO, and head of global investment services; Susan Moore, the chief administrative officer; Sheldon Francis, co-general counsel; and Christopher DeFrancis, co-general counsel and chief compliance officer.

“There was no specific intent to move the headquarters to Charlotte,” explains Finke. “It just turned out as we executed our business plan post-financial crisis, and as our leadership took form, it became clear this is where a lot of our growth has been and will be. There’s a very strong base of financial talent in this city, regionally we have great universities, and we have an airport which allows us to operate as a global investor.”

Just as the growth of Bank of America, Wells Fargo, and their predecessor banks drove much of the center city growth in Charlotte from the 1970s to the 2000s, Babson’s growth will soon bring a new addition to the Charlotte skyline—300 South Tryon—a new 25-story, 630,000-square-foot office tower located on the corner of Third and Tryon streets.

The site had been in the MassMutual real estate portfolio for many years; it was the first new uptown tower to be announced after the Great Recession of 2008-2009. Babson expects to relocate their Charlotte offices from the Duke Energy Center to the new tower sometime in 2017.

“As I looked at our long-term space plans, we needed more space,” says Finke about their plans to launch the new building. “Office vacancy was coming down fairly quickly, and when we did the fundamental analysis of Charlotte CBD office real estate, it made sense to develop a prime office building.”

Growth and Globalization

Today, Babson’s 1,100 employees offer a wide range of investment solutions to over 500 clients in more than 30 different countries. These clients include banks, insurance companies, pensions, endowments, foundations, sovereign wealth funds, and private wealth advisory clients.

Babson’s total assets under management have grown from $104 billion in 2007 to $223 billion as of the fourth quarter 2015, an average growth rate of about 10 percent per year. About half of Babson’s assets represent MassMutual’s general investment account, and the growth of MassMutual’s overall business is one important driver of Babson’s asset growth. Just over 60 percent of the external assets under management (those assets excluding the MassMutual general account) are from clients in North America; 26 percent are from Europe, the Middle East, and Africa; and the remainder is from the Asia-Pacific region.

But one amazing thing you notice about Babson’s growth is that, unlike other financial firms that suffered from 2007 to 2010, Babson continued to grow, fueled by large institutional investors in search of higher yields on their investments during the recession and the tepid economic recovery that has followed.

“Coming out of the financial crisis, investors were looking for higher yields and looking for investments that were less correlated to the equity markets,” explains Finke. “We also invested significantly in building out our local distribution business, and we now have about 100 people around the globe developing relationships with the largest institutional investors.”

Something else that helped Babson weather the crisis was their long-term, value-driven investment philosophy. Unlike some asset managers, the unique needs of their clients drive them to a more conservative investment philosophy.

“We’re not a hedge fund where we can just take our parlor chips off the table and go home when markets change,” states Finke. “Our clients are long term investors. You can’t go to cash in the general investment account of an insurance company. Our discipline has been built around the ability to manage through the cycle and adjust, both when times are good, and when times are not.”

In addition to their core asset management solutions, Babson has two wholly-owned specialized subsidiaries: Cornerstone Real Estate Advisers and Wood Creek Capital Management. Headquartered in Hartford, Conn. Cornerstone invests across all four segments of the real estate market—public and private equity and debt. Wood Creek based in New Haven, Conn., focuses on real asset investments, including investments in global agricultural resources, intellectual property, pharma, and reinsurance.

“There are a lot of interesting things going on within real estate,” Finke says. “Foreign money is looking for hard assets, so it just drives up the price of real estate in gateway cities like London and New York. The millennials are also driving growth in cities because of the re-urbanization process that is going on. We invest through cycles, so real estate is no different. It cycles relative to the economy, and it also cycles relative to what’s going on in terms of demographic trends.”

With offices in places like London, Sydney, Hong Kong, and Tokyo, Babson is truly a global business. Through those offices and their other U.S. offices, they are closer to their clients, but those offices are also where they are investing. Babson is a major investor in European high yield debt, Cornerstone invests in European real estate, and in Sydney and Hong Kong they invest in the Asian leverage finance market.

“When you think about the total business—Babson, Cornerstone and Wood Creek—we really have discrete teams defined by their functions,” explains Finke. “Global fixed income, global private credit, global real estate, and private equity are the key functions, but we do believe in being in the markets where we invest as much as we can.

“To sit in Charlotte and think you can invest in a middle market leverage buyout in Sydney, Australia, and do it well—that’s naïve. What you can do is find good people, share a system of how you invest—how you risk manage—and let them do their thing.

“We’re living through an extraordinary time of globalization,” Finke continues. “The technological revolution is bringing the world closer together, and because of that, you see more money flowing from one part of the world to the other. Over the last six or seven years we’ve seen many of our clients in the U.S. look more towards investing in the European high-yield market. They didn’t do that before.”

Finke explains how when investing globally an investor or an investment manager must also be mindful of the macroeconomics connected to the political events in those countries—whether it is the unrest in the Ukraine or the economic and political issues in Greece.

“You always have to assume something will go wrong, because something’s going to happen,” says Finke. “When we build portfolios, we have to consider how this company will perform if we have a real disruption in the Middle East and oil prices spike up.

“You have to build portfolios that have the ability to manage through tough times. We tend not to invest into trends; we invest in companies. We invest in projects, and we invest in properties where we can tangibly analyze the fundamental value.”

The World Economy

Where’s the world economy going?

“I wish I had a crystal ball,” laughs Finke. “What I’ve found since the financial crisis is no one’s right, and no one’s wrong! Every time there seems to be positive momentum somewhere in the economy, the next day you see a negative sign. The reality is the global economy is being exceedingly stimulated by cheap money in terms of low rates.”

“It used to be there was a real cycle coming out of a recession,” he continues. “There were layoffs, but then you’d get hired back. Well, this time, people didn’t just layoff—they reinvented. They became more efficient; they implemented new work processes or new technology; and some businesses completely changed their business models.”

Finke says that while it’s very hard to identify the drivers of growth in today’s economy, many companies are still well positioned to grow. So even though the overall economy may be stuck on a modest growth pace with fairly flat inflation, the key is to identify those companies with attractive growth dynamics that are not sensitive to negative GDP headwinds or low commodity prices.

“I think that’s why the feds have a real hard time here, getting off zero,” he admits. “It’s really hard to commit one way or the other, and to start pushing rates up.”

But in the final analysis, Finke says, no matter what the economy does, it all comes back to the client.

“We’re very proud of what we’ve accomplished since 2009. We wanted to create a presence as one of the leading global institutional asset managers, but that job is not yet done.

“Our goal is to build on what we’ve done before, and to take the disciplines of our investment process and the culture that we bring to what we do, and go to the next level—while always serving the client the best that we can.”

Babson Capital Management LLC

550 South Tryon St., Ste. 3300

Charlotte, N.C. 28202

Phone: 704-805-7244

Parent Company: Massachusetts Mutual Life Insurance Company

Subsidiaries: Cornerstone Real Estate Advisers and Wood Creek Capital Management

Affiliates: Baring Asset Management and OppenheimerFunds

Principals: Thomas M. Finke, Chairman and CEO; Russell D. Morrison, Vice Chairman, Head of Global Fixed Income; Cliff Noreen, President and Managing Director

In Business: 75 Years

Employees: Over 1,100 globally including over 500 investment professionals

Assets Under Management: Over $220 billion

Locations/Clients: Headquartered in Charlotte; locations on four continents and clients in over 30 countries

Business: Global investment management firm with expertise in a wide variety of traditional and alternative asset classes including global fixed income, structured credit, middle market finance, private debt and commercial real estate for both institutional and wealth advisory clients.



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