Marsico: When Going Private Goes Wrong

When Tom Marsico manned Janus Twenty JAVLX and Janus Growth & Income JAGIX, both flourished next to their large-growth peers. Between March 1988 and August 1997, Janus Twenty ranked fourth among large-growth strategies and ahead of 97% of the competition. As for Janus Growth & Income, it landed ahead of 85% of its peers on Marsico's watch (May 1991 to August 1997).

With that successful track record under his belt, Marsico struck out on his own in 1997 by creating Marsico Capital Management. He launched Marsico Focus MFOCX and Marsico Growth MGRIX (originally dubbed Marsico Growth & Income) on Dec. 31, 1997, which he would run by combining bottom-up analysis with his top-down views. Bank of America (then NationsBank) bought options for half the new firm for $150 million, and Marsico had subadvisory business right out of the gate with Nations (now Columbia) versions of the flagship funds launching at the same time.

The sibling growth strategies went gangbusters in the two years that followed and money poured into the funds and through other subadvisory and separate-account contracts. By mid-2000, Marsico's analyst team was 15 strong and the firm was responsible for more than $15 billion. Seeking to harness the distribution of a large organization, Marsico sold the rest of his firm to Bank of America for a combined total of $1.1 billion on the condition that it would keep an autonomous relationship with a separate compensation structure, benefits platform, and legal department. The year 2000 also marked the launch of two additional strategies, Marsico 21st Century MXXIX and Marsico International Opportunities MIOFX.

A Steep Price To Stand Alone
Fast forward seven years: The firm's assets under management increased more than six-fold to $94 billion. Efficient distribution had a hand in that, but the funds’ eye-catching track records also attracted plenty of attention. (Two more funds, Marsico Flexible Capital MFCFX and Marsico Global MGLBX, were launched in December 2006 and June 2007, respectively.) The following table reflects how the first four funds performed versus their category averages and benchmarks on a three-year rolling basis from their inception dates through June 2007.

  - source: Morningstar Analysts

With that period of multiyear growth as backdrop, and feeling no more need for the bank’s distribution capabilities, Marsico decided to buy back the firm in June 2007. At that time, the firm had 71 employees, including three portfolio managers (Tom Marsico, Jim Gendelman, and Cory Gilchrist) and 21 analysts. The main goal of the buyback was to put firm ownership into employee hands, helping ensure its legacy as a stand-alone asset manager. To make that happen, however, Marsico had to borrow a whopping 94% of the purchase price near the market peak and just prior to one of the country’s worst financial crises. While he and a group of 30 employees contributed $150 million in common equity, the firm took on $2.5 billion of debt/hybrid capital to complete the $2.65 billion deal.

Restructuring In Two Acts
The firm’s asset levels climbed for a bit longer, clocking in at $110 billion in October 2007. That trend was about to reverse dramatically, though. The six funds shed between one third to one half of their assets in 2008’s market meltdown. And when the markets came off their March 2009 lows, the funds didn’t keep up as well as they had in other strong bull markets. They fared a bit better in 2010’s slower-paced rally, but outflows from the loss of subadvisory contracts and individual investors took their toll. The firm’s assets under management fell to roughly $43 billion as of August 2010.

That level rose in the following months, but it was still not high enough to service the heavy debt load. So the firm was forced to restructure its debt in November 2010, a move that gave creditors 49% of the firm’s equity in order to eliminate $1.1 billion of the debt. Considering the debt restructuring a default, S&P and Moody’s downgraded the company to near the bottom of their ratings scales. The negative backdrop didn’t stop the firm from launching its first emerging-markets offering, Marsico Emerging Markets, the following month. However, with investors still sour on equity funds and 2011’s negative returns, the outflows continued.