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Burgundy founders wanted to stay independent, but they made two mistakes
The founders of Burgundy Asset Management Ltd. never wanted to sell the business they built over 35 years to a bank.
To his credit, Burgundy chairman and co-founder Tony Arrell admitted as much to clients last week. In an e-mail, he told some of the country's wealthiest families in the country that the founders' first choice would have been to pass their stakes in Burgundy to colleagues. This revelation came as Mr. Arrell unveiled what amounted to his only other option, a $625-million sale to Bank of Montreal BMO-T.
'In large part due to Burgundy's success, we have found it more difficult than expected to transition ownership of Burgundy from the founders and current leadership to the next generation of our people,' Mr. Arrell said in a note sent last Thursday, as BMO announced the purchase.
Mr. Arrell and other long-time Burgundy employees made two strategic mistakes that cost the firm its independence, offering lessons in succession to any entrepreneur-owned businesses.
Bank of Montreal boosts wealth management business with $625-million Burgundy deal
The founders failed to share ownership early and often in their careers, making it increasingly expensive for that next generation to borrow the money needed to buy them out. While Burgundy is private, industry sources said Mr. Arrell, co-founder Richard Rooney, chief executive officer Robert Sankey and a handful of senior executives own the majority of the company.
More importantly, Burgundy remained stubbornly committed to a value-focused equity investment strategy that attracted $27-billion in client assets. If this was the ice cream business, Burgundy tried to compete by selling only vanilla when rivals took the Baskin-Robbins approach by offering 31 flavours.
Burgundy's mantra is buy great companies for less than they are worth and hold them for the long term. But embracing value investing in recent years meant missing out on growth stocks such as the 'Magnificent Seven' U.S. tech companies that drove market performance. Burgundy also steered clear of alternative assets, such as private equity and private credit, which have become an increasingly significant part of wealthy investors' portfolios.
For a sense of what might have been at Burgundy, look at independent asset manager Connor, Clark & Lunn Financial Group Ltd. It started from the same place as Burgundy. The founders – Gerry Connor, John Clark and Larry Lunn – gracefully exited a generation back.
CC&L, launched in 1982, lapped its rival by getting succession right and offering a range of stock, bond, real estate and alternative-asset strategies.
In 2002, when assets were $14-billion, CC&L began to partner with smaller, specialized fund mangers, paying for ownership by issuing CC&L shares, and keeping teams in place. The firm, now moving to its third generation of owners, oversees $150-billion of assets under 15 brands.
CC&L's secret sauce consists of sharing the wealth and embracing a variety of investment approaches. Both ingredients were missing at Burgundy.
Once Burgundy is in the BMO family – the purchase is expected to close by the end of the year – its equity funds will be one more flavour on a bank-built menu that puts Baskin-Robbins to shame. BMO's wealth management platform has $423-billion of assets.
Over time, this acquisition will pay off for BMO as Burgundy's financial advisers start selling the bank's other investment products to their high-net-worth clients.
Succession is never easy to manage in a consolidating asset management industry. Numerous founders cashed in by taking firms public, then enjoyed a second payday by selling to larger players. The principal players at Gluskin Sheff + Associates Inc, Trimark Financial Corp. and Mackenzie Financial Corp. all followed this script.
It is no coincidence that families or founders control three publicly-traded fund managers –AGF Management Ltd., IGM Financial Inc. and Fiera Capital Corp. – who have chosen to be diners, not dinner, by acquiring rivals.
Burgundy's sale is a major wealth-creation event for Mr. Arrell and his family foundation, but bittersweet. This is an executive who played senior roles at a trio of independent investment banks – Gardiner Watson, Wood Gundy and Midland Walwyn – before starting Burgundy. He spent a 55-year career avoiding working for the banks that now dominate Bay Street.
The decision to sell Burgundy to BMO came after 'long study and much discussion‚' Mr. Arrell said in his e-mail to clients. Sharing ownership earlier in Burgundy's evolution and embracing a variety of investment styles could have meant a different conclusion to those discussions.
