Marsico: When Going Private Goes Wrong
After much negative news, the dust seems to have settled at the growth equity shop.
When Tom Marsico manned Janus Twenty 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 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.
Assets fell further in the first half of 2012, which led to another debt restructuring in early September. The agreement wiped another 56% of debt off the balance sheet and extended the maturities for almost all remaining issues to 2022. In the deal, Marsico and his employees gave up the controlling equity stake (it now sits just under 40%), but the firm founder maintained 100% voting control.
Troubling Times, Troubling Results
The Marsico funds posted mixed relative results for the first three quarters of 2012. (The firm shuttered the tiny Marsico Emerging Markets fund midyear.) Looking from the time of the firm buyback through Sept. 30, the firm’s oldest funds have clearly struggled. Again, the following table reflects results on a three-year rolling basis:
- source: Morningstar Analysts
Marsico Flexible Capital and Marsico Global, however, stayed ahead of their category averages and benchmarks in 100% of three-year rolling periods from their respective December 2006 and June 2007 launches through the end of September. But those records, as well as the results for Marsico 21st Century, must be taken with a grain of salt because turnover has plagued the investment team.
Four portfolio managers have left within roughly the past year, three of whom are now working at other asset managers. Cory Gilchrist, who managed both Marsico 21st Century and Marsico Global, left in September 2011. Joshua Rubin and Charlie Wilson, who skippered the now-liquidated emerging-markets offering, left earlier this year. And Doug Rao, former lead manager of Marsico Flexible Capital and comanager on Marsico Growth and Marsico Focus, departed in July. That the departed managers contributed research for use by the entire team makes it an even bigger blow.
The analyst ranks haven’t been stable either: Seven analysts have left the firm since 2010. They’ve mostly been replaced, but the team of 10 is much greener than it was a few years ago. Only three of them have been on the team since before 2005. The remaining seven joined since 2011, and only two had significant analyst experience. Even though the firm never experienced layoffs or budget cuts, the firm’s financial woes must have created a challenging work environment for the investment team.
Today Marsico Capital Management appears to be on more solid financial footing, particularly because most of its debt isn’t due for 10 years and the last restructuring involved an increase in the amount of money dedicated to operations. But it will likely be a slow road to recovery for the firm. Middling to poor five-year returns for the four oldest funds isn’t likely to attract much investor attention. That the manager spots for Marsico 21st Century and Marsico Flexible Capital were given to analysts with little to no portfolio manager experience isn’t likely to help, either. So retaining its subadvisory contracts will be key.
From the standpoint of the investment team, the string of manager and analyst defections has resulted in not only a greener team but one that is significantly smaller. While the group was 24-strong at the time of the buyback in mid 2007, it counted 16 members as of September 2012. Marsico and the more senior members have more work on their plates in training the new analysts, and it will take some time to see how the current team gels.
This rebuilding period, plus other drawbacks including untested managers and high fees, have resulted in Negative Morningstar Analyst Ratings on Marsico 21st Century and Marsico Flexible Capital. The same concerns as well as poor results during the past five years on manager Jim Gendelman’s watch garner a Neutral rating for Marsico International Opportunities. While the flagship funds remain in the best shape given Marsico’s strong overall track record, his weakened support system, and his newly added responsibility on world-stock offering Marsico Global, resulted in downgrades for Marsico Growth and Marsico Focus from Bronze to Neutral.
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