Diversification through partnership

 

French banking group BNP Paribas has built a distinctive business model for its asset management business. Through a system of partnerships with specialist investment firms it has created a diversified portfolio of skills which it offers to clients through a single platform.

Among the key ‘signings’ have been global fixed income specialist Fischer Francis Tree & Watts (FFTW) in 1999, foreign exchange specialist Overlay Asset Management and the funds of hedge funds specialist Fauchier Partners in 2001.

Over the past five years the number of partners has grown from seven to 15, as assets under management have swelled from €170bn to €344bn.

The man responsible for many of these partnerships is Gilles Glicenstein. He has been chief executive of BNP Paribas Asset Management (BNPP AM) since 1999.

“Our vision is based on a number of simple ideas,” he says. “One is that there is no such thing as consolidation in the asset management world. Instead there is a fragmentation of the industry into a high number of specialities.”

A multi-specialist approach has a number of attractions, he says. “It’s a nice business model because it’s client-friendly and people-friendly. Investment managers love to be independent. It’s also a very good model for myself as CEO because it means I run a diversified portfolio which is more or less uncorrelated.”

BNP Paribas felt that this multi-specialist approach deserved a higher profile than it currently had, and in May it launched a new brand, BNP Paribas Investment Partners (BNPP IP), with Gilles Glicenstein at its head.

Glicenstein says that the move is not strictly a re-branding of BNPP AM, but rather an initial branding of BNPP AM’s partnerships: “We did not have a name that represented the whole range of firms and specialities that we have built over the years. BNPP AM was not the parent company nor was it the head of the partners.”

BNP Paribas needed a name that described the partners’ arms-length relationship with the BNP Paribas group, rather than closer integration with BNPP AM, he says. “If we had wanted an integration model we would have put BNPP AM in front of each partner’s name, which is not what we have done.”

The overall aim of the exercise is to raise the profile of BNP Paribas’s asset management activities, he says. “For many years we have had a very low profile, with no very significant image of ourselves. So we wanted to give a better presentation of what we are doing, and to tell clients and the market place what we have done in the past 10 years and what we intend to do in future years.”

The branding exercise followed a reorganisation of BNPP AM’s investment teams two months earlier. This involved a merger of the traditional asset investment manangment team and the indexed and structured investment manangment teams to create a single business division - traditional structured and indexed investment management.

This new division will operate alongside two other existing divisions of wealth management, and alternative investment manangment and private equity.

The integration is designed to help BNP Paribas to align its business with changes in the market place, says Glicenstein. “Competition now comes not only from the fund managers but also from the capital markets. The reorganisation of BNPP AM was based mainly on the idea that the traditional fund managers had to change to take account of the reality that hedge funds, derivatives, trackers and passive management change the trends and the way that the market works. if you don’t integrate that culture within asset manangment, you will be at risk.”

The new integrated organisation is divided into three main areas of responsibility.

The first is alpha management, which combines money markets, European fixed income, European equities, US equities, Japanese equities, global and emerging market equities. This is the core of BNPP AM’s traditional business line.

The second is SIGMA portfolio management, which includes structured and capital guaranteed investment management, index-linked portfolio management and ETFs, balanced fund management and asset allocation. Merging these activities, Glicenstein says, will strengthen BNP Paribas IP’s hand in risk allocation and multi-strategy overlay.

, which includes structured and capital guaranteed investment management, index-linked portfolio management and ETFs, balanced fund management and asset allocation. Merging these activities, Glicenstein says, will strengthen BNP Paribas IP’s hand in risk allocation and multi-strategy overlay.

In SIGMA, structured investment management has been divided between BNPP AM and FFTW. “All credit derivative products are on the fixed income side so we’re transferring the fixed income side of BNPP AM to FFTW. All equity derivatives will be on the BNPP AM side,” he says.

Glicenstein says the importance of the reorganisation is that it helps BNP Paribas identify where its expertise really lies. “Putting activities into a new envelope is only a technique. What matters is the understanding of the underlying assets.

“What we have done with BNPP AM is say ‘you’ve got to be competitive, you’ve got to understand the underlying assets we manage’. That was the reason we made all these changes, with the SIGMA group playing an important role packaging different skills into a single product.”

The third new area of responsibility is investment and business solutions (IBS). IBS is intended to be a clearing house for ideas about best practice and the efficient use of resources, says Glicenstein.

“One of the risks of our multi-specialist business model is that you can create silos where teams ignore what their neighbours are doing. As a result different teams can be working on similar projects,” he says.

“Autonomy is fine, but for the front office, not the back office. So the primary role of IBS is to promote a common approach on some issues.”

Trading desks are one example of where resources can be pooled, he says. “Many teams do not seem to have their own trading desks. That could be a common resource.”

Sales support is another area where resources can be shared. BNP Paribas IP has a sales force of over 250 staff operating in 28 countries. “We have a policy of having a very local sales force, fully integrated in their home market,” says Glicenstein. “But they’re not specialists in the whole range of products on offer. They need to have product specialists to support the sales in an efficient manner so that all products are being presented to clients.

“We will also provide seed capital to partners who have innovative ideas. The merits of the parent company go beyond sales and operations,” continues Glicenstein. “Since we are a capital partner we can help seeding new strategies.”

However, to win seed capital, partners must persuade BNP Paribas that these strategies are sustainable. “Partners come regularly to us and say they want seed capital to seed a new strategy. We say okay, we can provide that, but it has to be thoroughly tested, with a proven track record. It is not provided automatically.”

An important part of Glicenstein’s role at the head of the new partnership is deciding which areas BNP Paribas should invest in and which it should avoid.

“It’s very much a matter of finding the right speciality and investing in it to be competitive,” he says. “If you’re not good at something, leave it alone.”

BNP Paribas has so far not entered the LBO end of private equity, where it considers there are already too many established players. On the other hand it is looking seriously at infrastructure, a far less crowded area. Glicenstein will remain wary of following fashionable ideas such as 130/30 (limited shorting) and liability-driven investment (LDI) until he is sure that BNP Paribas has the necessary skills. “Few years ago, people said we should create a BRIC fund, but we answered we will only create such a fund when we have the underlying skills to manage Brazil, Russia, India and China and to package it in a funds that works. Today, we have built strong positions in each of these countries,” he says.

Similarly with global tactical asset allocation (GTAA): “We think that GTAA is quite interesting, but it requires a number of skills that we don’t have today in terms of managing risk and implementing models.

“One of the reasons behind the creation of
SIGMA portfolio management is that we can say if you’re interested in GTAA, go ahead and work on it. Show us you can bring something to the market, with the right people, the right systems and the right models and then we’ll do it.”

Future partnerships will be subject to the same sort of scrutiny. Glicenstein once said that he planned to add one new partner to the partnership each year up to the year 2010. Today he says there is no set programme, but that he is always looking for partners in particular areas. “We still consider there is room for growth in the emerging markets and we have publicly announced we plan to launch infrastructure funds . We will probably have other private equity initiatives before the end of the year.”

Yet there are limits to the size of the partnership, he says. “We’re 15 firms now and we don’t plan to be 50. The number needs to be manageable, not least because personal relationships are involved.

“I was personally involved in many of the deals. Partnerships are a real story of trust, and trust needs time to sustain. For that you cannot have an unlimited number of partners.

“But we still have room for growth, both geographically and product-wise. I believe that maintaining the pace, having a couple of initiatives at least each year for the years ahead, is reasonable.

Growing assets by acquisition is not the aim, he says. “We won’t buy large mature firms just for the sake of adding assets, because there is no growth behind that. And we will just destroy value. For us, the best business model is finding firms at the early stages of their development. These are firms that want to grow, but do not have the resources to sustain a global sales force, reporting, client servicing, and systems. These are all things we can provide.

“We tell prospective partners that both of us are going to grow together and both of us will benefit from that growth.”