Defining moment

There was a time in late 2008 when the world for many professionals at AIG Investments altered beyond recognition. The news they were seeing and hearing didn’t seem to match with the company they knew and grew up in.

“It was surreal, that’s the only word I can use to describe it. In a million years I would never have guessed that AIG would be going through this,” says Harvey Lambert, who ran the secondaries programme at AIG and these days works as head of private equity secondaries at PineBridge Investments, the independent firm that emerged from AIG Investments.

Lambert (left), Thompson, Costabile: in the maelstrom

While alternative investments were not part of the problems threatening to topple the insurance giant, AIG as a brand was quickly becoming a pariah. Bankruptcy was looming; a government bailout was in the works.

Lehman Brothers had collapsed only days before, and the health of the US economy seemed close to shattering. A failure of AIG might be enough to bring down the entire system.

Private equity principals at AIG Investments had a special view of the collapsing world around them from the centre of the maelstrom. It’s times like this when people show their true characters.

Private equity principals at AIG Investments like Lambert, Steve Costabile, head of PineBridge’s private funds group, and Bob Thompson, head of alternative investments and a member of PineBridge’s executive committee, faced a daunting task. Surrounded by uncertainty, they needed to keep their limited partners reassured and their teams strong, focused and busy.

Thompson recalls that in September 2008 his focus was two-fold: one was talking to limited partners, the other was talking to his team. LPs had to be reassured that what was happening was at the parent and that there was no risk to their capital. “We’re still here to manage it,” he says.

“To my team it was: ‘This is going to be a defining moment in all of our careers. We have to stay the course, remain focused and recognise that we have a fiduciary responsibility to our investors. We need to make sure we understand where the risks are in the portfolio and convey that the best we can to our investors’.”

In a strikingly candid interview, Thompson, Lambert and Costabile all sat down with PEI and talked about the emergence of PineBridge from AIG, and the many months of uncertainty and hard work that preceded the creation of the independent firm.

We learned a lot about ourselves, some of it we liked, some of it we didn’t like.

Bob Thompson

“The last 12 to 18 months have been incredible. . Our LPs were very candid and we learned things from them that we take to heart,” Thompson says. “We come out of this process independent, but with substantially more humility than when we went in. We also come out nicely positioned to continue to improve in everything we do and to continue to get better.”
 
THE LOW POINT
 
Costabile, Thompson and Lambert all pause when they think back on that dark September in 2008. In perhaps the most stunning weekend in Wall Street’s history, Lehman Brothers collapsed into bankruptcy, Merrill Lynch agreed to sell itself to Bank of America and AIG appeared to be approaching a precipice.

On September 16, 2008, the federal government seized control of AIG in an $85 billion bailout, an amount that would eventually balloon to about $183 billion. AIG has used about $83 billion, and is working to sell assets to pay back the government.

The three PineBridge principals remember the time vividly, and still seem a bit shocked when they think back to that tumultuous week.

On the Wednesday that the deal with the government was announced, Costabile had received a visit from the dean of his business school. “We were looking at each other and I smiled, perhaps still in somewhat of a denial stage,” recalls Costabile. “I said: ‘This is going to be a case study for years to come.”

“I didn’t fully understand how big the implications were going to be for the entire entity,” continues Costabile, who says the low point for him in terms of morale came in March 2009, watching former CEO of AIG Edward Liddy in front of Congress. “You’re sitting there thinking, ‘the guy’s doing the best he can’, and you’re looking at that and saying, ‘man, it’s unbelievable’,” he says.

I look back on this and easily conclude that we [AIG] were the whipping boy of the subprime crisis.

Harvey Lambert

Despite the shock and uncertainty roiling the company, the managers had teams to lead and jobs to do. A lot of this boiled down to pep talks to investment teams on an almost daily basis, keeping everyone updated on events and making sure they were focused and communicating, Lambert says.

“Every week something seemed to change. I look back on this and easily conclude that we [AIG] were the whipping boy of the subprime crisis and the focus of much anger,” Lambert says.

“Every morning you’d read the newspaper and every day there’d be another headline about AIG. My biggest concern was my team’s morale. I wanted to keep them focused on managing the fund,” Lambert says.

The secondaries team continued investing through the downturn, even amid the tumult taking place at AIG.  Lambert’s team was experiencing “unprecedented opportunity for secondaries”, he says.

“We did deals, we revised our portfolio management system, and created a new portfolio management database from scratch, we changed our models to reflect the new world we were in, we spent a lot of time debating and trying to figure out how to price risk in this environment,” he says. “It was a very busy time, a very uncertain time. I look back and I’m proud of what we were able to accomplish.”

Because the environment was so intense, the news was everywhere, and the work load seemingly unending, it was impossible not to bring home some of the stress from the office.

“I can say several of us were just consumed and absorbed by this process and keeping it on the tracks, but every once in a while there’d be a step backwards,” says Thompson, who notes that their families had to work through the process via their interaction with friends in the community, where it was “all about AIG”. “It’s the same thing; they have to work through that too. It’s the same challenge, only without quite as much information.”

In some cases, the sharing of information with loved ones only added to the stress, and decisions were made to stop talking about the situation.

“My wife would come and say, ‘What’s going on?’ and we would chat, but we stopped chatting about it around January 2009, and never really talked about it again,” Costabile says. “Because for me, what would be the point? I knew some things, I didn’t know a lot of things, and there was a tremendous amount of uncertainty. To go home and talk about it wouldn’t do me any good, and would make someone else even more uncertain and even more worried about things. So in early January 2009, we stopped talking about it. Everyone had to deal with it in different ways.”

Almost as soon as the government bailout was announced, AIG began looking to sell assets to pay back the loans, including AIG Investments. After a long and grueling sales process, a huge chunk of AIG Investments would be spun-out into an independent firm called PineBridge Investments.
 
THE SPIN-OUT
 
Richard Li, son of the world’s 14th richest man, Li Ka-shing, started Pacific Century Group in 1993. Li had sold STAR TV, the first-ever pan-Asian satellite television operator, to News Corp for $950 million. Li initially invested $125 million in the company in 1990. He used the proceeds from the sale to start Pacific Century Group.

PCG got involved in the AIG spin out because Li was interested in expanding into asset management. Some professionals from PCG knew AIG employees in Asia, Thompson says. “When he heard there was an opportunity here, he became very interested,” he says.

Throughout much of the sales process, the AIG team thought the eventual partner for the spin out would be a consortium, “maybe two or three folks with different attributes,” Thompson says. But whatever the end result looked like, Li and PCG were probably going to be a part of the final product. “Richard Li and PCG were a constant, voicing strong enthusiasm about the business throughout the process”, Thompson says.

On 4 September, the sale agreement was signed between AIG and PCG only.

But the signed agreement marked only the beginning of what would turn out to be a long, arduous six month process to close the deal. The PineBridge team still had many hurdles to vault before they could breathe easily.

There were multiple closing conditions and “migration and transition issues” to be addressed, says Thompson. Regulatory approvals had to be obtained in 32 different jurisdictions. “Regulators in some of those markets are quick and others are not so quick,” he says.

“We were a division of AIG and very much a utiliser of their central service and systems. It took a long time to get all the various separation activities done and the various regulatory approvals done,” he adds.

While the deal was coming together, the investment division faced an unfamiliar chanllenge: it was being scrutinised in detail as part of a bidders’ due diligence process.

“We were neither the buyers nor the sellers, so there were things we knew and things we didn’t know,” Thompson says. “So there were things we could communicate and things we couldn’t, and this clearly creates stress as it relates to the GP/LP dynamic.”

As the target of an acquisition, the private equity dealmakers at AIG got to see first hand what it’s like to be picked through and examined in a due diligence process.

“We all do deals for business as a living; we all know how to do deals,” says Thompson. “We all know how to evaluate other people, their companies, their succession plans, their terms, their portfolios. We do that, and now we’re the target, and it’s in choppy market conditions.

“It’s incredibly invasive,” he continues. “Every nook and cranny of $85 billion to $90 billion of assets across all these different asset classes was examined very thoroughly – its performance, its attribution, people and stability. LPs, competitive advantage, pricing, and then their people need to analyse all of our risk management systems, all our business continuity systems. Our plan for separating and migrating out of AIG. Imagine the work, it was substantial. We had to get all that done at the same time we’re making sure we’re keeping all these trains on track.”

All the work, of course, meant lots of teams and lots of people jostling for space and access to information.

“At various points in time there were multiple financial partners to work with. At the end of the day, there were three law firms, and three investment banks – one representing our new partner, one representing the [federal government] and one representing us,” Thompson says.

Depending on who you ask at AIG and PineBridge, the level of concern about the deal derailing before the final close varied. Costabile says he never doubted the deal would close, but he was relieved when it finally did.

“We went through such an emotional roller coaster, it was a relief. I wouldn’t say it was jump for joy, high fives. It’s when you know something is coming but you can’t get the date down,” Costabile says.

“You see this coming, and you keep anticipating, keep trying to communicate with your clients, keep them pumped up. Everyone was working as hard as they could, but it wasn’t easy, you had the [US] Treasury, the steering committee – you have a lot of interested parties. Even near the end when we were a week away from the deal, you had some other situation pop up. A week before we were supposed to close, it’s like, ‘uh, you’re going to have a problem’. So it was relief, really truly relief,” Costabile says.

At the end, PCG was the only buyer, spending $500 million for a majority stake in the firm.
 
NEW AND IMPROVED
 
Today, PineBridge’s various private equity arms are out searching for deals, shoring up portfolio companies, talking to LPs and many are gearing up for fundraisings. The firm is also working to standardise its reporting methods to become more LP-friendly.

The three principals decline to comment on specific fundraising details, but Thompson explains there are a number of different products “sneaking up to the starting line” across all the different business lines. “Across the board we’ve been doing all the pre-planning, pre-marketing, to get back out there and raise capital.”

Costabile says that many of the team members are “anxious” to share new ideas with clients. In the case of the private equity fund of funds business, they are particularly focused on opportunities for debt-oriented investments. “We’re seeing opportunities across the credit spectrum, in private funds looking at mezzanine, junior debt. There are all kinds of dislocations in leverage finance and we think we can take advantage of that,”

These market dislocations have also created “great value plays” in the small- to mid-market buyout space and among growth companies with strong prospects, says Costabile. “Valuations are very reasonable now because of all the uncertainty. We were very excited to get out there and invest.”