Cornerstone Capital Mgmt.’s Capital Dreams

Cornerstone Capital Mgmt.’s Capital Dreams

Cornerstone Capital Management’s Andy Wyatt bet that a ‘dream team’ of money managers could get Wall Street’s attention. It just took a little longer than expected.

In the seven years since he jumped from AllianceBernstein, Tom Kamp, president and chief investment officer at Edina-based Cornerstone Capital Management, has helped boost the investment firm’s assets under management 27 times, from $100 million to $2.7 billion. But the real game changer came this fall, with the announcement that the New York Life Insurance Company was taking a 31.5 percent stake in Cornerstone through a subsidiary, Madison Square Investors. Over the next seven years, New York Life will increase that stake and become majority owner.

That’s huge for Cornerstone, but Kamp believes it is also a a sign of the Twin Cities’ resurgence as a major money center.

“I’ve seen this movie before. This is exciting!” says the perpetually buoyant investment manager.

The deal is all about growth—in assets under management and the capacity to generate income they represent. The embrace will immediately add $1 billion to the portfolio Kamp manages for pension funds and other big institutions. The deal, which was expected to close by the end of January, will also put an additional $10 billion run out of New York (and a portion of related management fees) under the oversight of Cornerstone founder and CEO Andy Wyatt and Kamp, who will assume additional responsibilities under the new entity.

Even more important, the deal will harness one of the few “white glove” distribution powerhouses that can present Cornerstone’s mutual fund and investment approach to large investors worldwide. “We don’t talk about how fast we can grow,” Wyatt muses. “We talk about what our capacity is. How much money could we manage? We think we could run $50 billion today.” He estimates that with New York Life, they can grow 10 times faster than they could on their own, enabling them to “build a deeper bench … to do better what we already do very well right now.”

Kamp’s boyish grin attests to the upside opportunity he sees. “For me to invest 10 times as much money as I currently manage is adding an extra zero to every trade. The amount of research that goes in [to an investment decision] doesn’t change. There’s no business that has more operating leverage.” After a pause he concedes: “Maybe the software industry.”

For Kamp, the deal is a harbinger of Minneapolis’ money center renaissance. A decade ago, this area was home to a concentration of investment managers focused on the strategy known as large-cap growth—bets on the United States’ largest growth companies. That was before major players like American Express and AllianceBernstein shrank their Twin Cities presence.

The duo’s optimism may be grounded in the experience of another Twin Cities money manager, Clark Winslow, who sold his firm, Winslow Capital Management, to Chicago-based Nuveen Investments in 2008. At the time, Winslow managed just north of $4 billion. By the end of 2012, boosted by Nuveen’s distribution capability, it reached $35 billion. (Included in that is the $17 billion MainStay Large Cap Growth Fund that Winslow co-manages for New York Life, which is unaffected by the Cornerstone deal.)

For Wyatt, the New York Life investment caps a journey begun in 1993. With backing from silent partner and local real estate investor Dave Frauenshuh, Wyatt founded Cornerstone to manage wealthy individuals’ investments. After a dozen years, Wyatt set his sights on the brutally competitive institutional investment management business. In early 2006, he hired Kamp, with a stellar investment track record, away from AllianceBernstein’s Minneapolis office. At the time, Cornerstone’s assets under management totaled $100 million, $65 million in stocks.

The two freely admit that they underestimated by half the amount of capital and time it would take the new venture to reach profitability and positive cash flow. They cited the market drop in 2008, which hit large-cap managers with particular ferocity, as one factor.

But there were other obstacles, some self-imposed. “We recognized my track record [at AllianceBernstein] would get stale. I really only had one shot. If we screwed it up, we’d be done,” Kamp said. To guard against that risk, Cornerstone implemented a “very expensive” Field of Dreams approach, paying top dollar to hire the investment professionals who could attract and retain institutional money. Kamp joined Wyatt as employee number five. Today the firm employs 16, including five senior research analysts.

But building that team did not automatically turn on the money flow. “Although I had come from Alliance where I’d managed in excess of $13 billion, I naively assumed that within a year we’d raise a billion and within two or three years we’d have 2 billion,” Kamp admits.

Instead, the market sat back … and watched.

Wyatt captures their dilemma, posing the question on potential clients’ minds: “Was Tom Kamp good because of Alliance or was Alliance good because Tom Kamp was there?” By year three, Cornerstone’s performance had melted away doubts, and the money started to roll in. At the end of 2008, Kamp was managing more than $500 million. That figure nearly tripled in 2009 to $1.4 billion, helped in part by a blistering top-quartile performance among large-cap growth managers. In 2012, assets approached $3 billion, up 58 percent in a year.

The partners realized they no longer needed outside financing. “What we really need now is a distribution partner,” Kamp says.

New York Life Approaches Wyatt

While he says he was not looking for a buyer, Wyatt recounts the unsolicited call he received in August 2011 from Jay Giacco, managing director of M&A and business development at New York Life, who proposed they explore a combination. Giacco had personally witnessed Cornerstone’s performance through a fund he owned that Cornerstone co-managed.

New York Life declined requests for comment from Giacco, citing the “quiet period” before the deal closed. The company did provide a statement from Yie-Hsin Hung, senior managing director and head of institutional investments for the Investments Group of New York Life: “Our stake in Cornerstone enables New York Life to complement our investment capabilities in large-cap growth equities, an area valued by institutional investors. We are delighted to add a firm with Cornerstone’s expertise and track record to the New York Life family of investment boutiques.”

Since its launch in 2006, Kamp’s Keystone Large Cap Growth Fund has outpaced other funds in the category, as well as the S&P 500 benchmark over most periods, according to Morningstar Research. Through the first nine months of 2012, the fund clocked a 17 percent return, outpacing other large-cap growth funds by 1.11 percent and the S&P 500 by 0.63 percent. Looking back to pre-crash 2007, the fund is up a meager 2.07 percent, but that five-year climb out of the hole bested Kamp’s large-cap peers and the S&P index by 0.96 percent and 1.02 percent, respectively.

Under the deal, the Keystone Large Cap Growth Fund will be combined with two funds from Madison Square Investors, to be renamed MainStay Cornerstone Growth Fund.

Wyatt recognized the opportunity to align with New York Life’s reputation and reach. “You would have to think long and hard before you say no,” especially given Cornerstone’s desire for growth, he says.

Long-Term Payout

According to the terms of the deal, Frauenshuh’s Cornerstone stake will be bought out for an undisclosed amount, while the entire Cornerstone team’s payout down the road will be based on their performance with their large-cap growth investments as New York Life adds to its position in year four and reaches majority ownership in 2020. In the near term, Wyatt and Kamp, both 51, won’t see any payout. “In fact, it’s going to cost us,” Wyatt says, with “significant” personal tax bills due in 2013 as they recognize paper profits to convert from an S Corporation to an LLC.

It may be premature to call the Cornerstone deal a turning point that will restore the Twin Cities’ rank as one of the top money centers. But it clearly reinforces the area’s reputation as a home to some of the savviest investors.

News of the deal brought a flurry of activity to Cornerstone’s offices, with visitors filling meeting rooms to pitch their investment ideas. Wyatt takes it all in, smiling with the confidence of a man whose plan is coming together. He built a team, hoping the investors would follow—and eventually, they did.

Brad Allen is a former corporate investor relations executive who writes about the capital markets and other business topics.