Is There a Bubble in Private Credit? This CEO Weighs In. | At Barron's

Key Concepts

• Employee Ownership: Newberger Berman operates as a 100% employee-owned firm with a broad and deep ownership structure (817 owners).
• Lines of Business: The firm’s assets are divided roughly equally between Stock Picking (Value-oriented), Fixed Income, and Alternatives.
• Private Credit: Discussion of the growth, potential bubble, and Newberger Berman’s conservative approach to this asset class.
• Roy Newberger’s Legacy: The firm’s founder and his impact on its culture, art collection, and investment philosophy.
• Blue Owl: Newberger Berman’s relationship with Blue Owl, originating from a spin-off called Dial.
• Value Investing: The firm’s historical strength and continued presence in value investing despite market headwinds.

Investment Management at Newberger Berman: A Deep Dive

I. Historical Context & Ownership Structure

Newberger Berman was founded in 1939 and experienced a significant turning point when acquired by Lehman Brothers. Alongside Lincoln Capital (fixed income) and Crossroads Group (private equity fund of funds), they formed Lehman Brothers’ Investment Management division. Following Lehman’s collapse in the 2008 global financial crisis, the employees of the investment management division successfully purchased the firm from creditors. This resulted in Newberger Berman becoming a wholly employee-owned company, currently with 817 owners. This ownership structure is central to the firm’s operating philosophy.

II. Business Lines & Asset Growth

Newberger Berman’s business is currently divided into three primary areas, each representing approximately one-third of total assets under management (AUM), which currently stands at around $558 billion. These are:

• Stock Picking: Historically focused on value investing, facing challenges due to the rise of passive investing.
• Fixed Income: A significant growth area, experiencing substantial capital inflows.
• Alternatives: Another key growth driver, attracting considerable new capital.

Approximately 70% of AUM is institutional, while 30% is allocated to individuals, half of which flows through financial advisors like Morgan Stanley, Merrill Lynch, and Julius Baer. Since the 2008 crisis, all three business units have grown materially, with fixed income and alternatives leading the growth in terms of organic capital inflows.

III. The Enduring Legacy of Roy Newberger

Roy Newberger, one of the firm’s founders, was a notable figure on Wall Street and a passionate art collector. He prioritized supporting struggling artists over acquiring expensive, established works. The firm still maintains a significant portion of his art collection, which was temporarily seized by Lehman Brothers’ creditors during the financial crisis but later repurchased for approximately 7% of its original value. Newberger’s philanthropic approach to art, inspired by the story of Vincent Van Gogh’s struggles, remains a core part of the firm’s culture. He passed away in 2011 at the age of 107, having remained actively involved with the firm until shortly before his death.

IV. Alternatives: Growth, Caution, and the Private Credit Landscape

The alternatives business is a major driver of growth for Newberger Berman. While predominantly serving institutional clients, the firm has been more cautious than some peers in expanding into the retail market. This caution stems from concerns about capital deployment timing and potential accounting anomalies in areas like private credit secondaries.

George Walker expressed concern about a potential “bubble of talking about a bubble” in private credit, noting that while the asset class offers a liquidity premium and can reduce overall portfolio risk, rapid growth and potentially lax underwriting standards could lead to future problems. He highlighted that many investors are allocating a relatively small percentage of their portfolios to private credit (2-3%) compared to the 20-30% often recommended, suggesting room for continued growth. Newberger Berman has a stake in Blue Owl, which originated from a spin-off called Dial, led by Michael Ree and others within the firm.

V. The Advantages of Private Ownership

Newberger Berman’s 100% employee ownership is a defining characteristic. The firm operates with a different financial structure than publicly traded or externally owned firms. Instead of allocating 40% of revenue to employee compensation, they allocate 60%, funded by reducing spending on non-personnel expenses. This allows for greater investment in the business, employee retention, and client service. Deferred compensation is invested alongside clients, aligning employee incentives with client outcomes. Walker emphasized that this structure fosters a long-term perspective and a client-centric approach, free from the pressures of external shareholders. He believes this structure is a significant competitive advantage.

VI. Economic Outlook & Market Perspective

George Walker expressed a constructive outlook on the economy and markets, citing strong corporate balance sheets, ongoing fiscal stimulus, and the transformative potential of artificial intelligence (AI). He acknowledged long-term challenges but believes current tailwinds are propelling growth. He noted a concern about the K-shaped economic recovery and the need to address inequalities. The firm has generally leaned into risk, anticipating continued market appreciation.

VII. Family Legacy & Personal Reflection

George Walker acknowledged his family’s long history in finance but described himself as a “rebel” for choosing to forge his own path. He emphasized that the firm’s success is primarily due to its unique ownership structure rather than individual leadership.

Data & Statistics Mentioned:

• AUM: Approximately $558 billion.
• Employee Owners: 817.
• Total Employees: 3,000.
• Asset Allocation: Roughly 1/3 each in Stock Picking, Fixed Income, and Alternatives.
• Institutional vs. Individual AUM: 70% Institutional, 30% Individual.
• Passive Investing Market Share: Now the majority, previously less than 5% when Walker started in the business.
• Blue Owl Vehicle Portfolio: Approximately 100 individual investments, half made in the past two years.
• Private Credit Allocation: Investors typically allocate 2-3% of portfolios to private credit, while recommendations suggest 20-30%.

Conclusion:

Newberger Berman distinguishes itself through its unique employee ownership structure, a diversified business model, and a cautious yet optimistic approach to investment management. The firm’s commitment to long-term value creation, fostered by its ownership model and the legacy of its founder, positions it for continued success in a rapidly evolving financial landscape. Its conservative approach to alternatives, particularly private credit, reflects a focus on risk management and sustainable growth.