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With Hurley now characterized as expendable, the New York bank makes Karl Heckenberg chief-in-waiting and Harold Evensky expresses 'reservations' about Emigrant Bank power play
November 15, 2017 — 9:38 PM UTC by Lisa Shidler
Brooke's Note: Long, tightly wound relationships unravel in short order every day. Sometimes it's an accumulation of toxicity that becomes too lethal for the parties to bear. There is plenty of evidence of poison here in the mounting battle between Mark Hurley and his backer, billionaire Howard Milstein. Yet typically a catalyst is also close at hand of a size commensurate to the strength of the bonds it is helping tear asunder. I submit that a perceived explosion in the number of RIAs seeking an LBO is putting dollar signs in the eyes of all parties. This Hurley-Milstein pairing has produced a measly two deals a year since its founding 11 years ago, many of them small. Now many deals a year could get done, of much greater size. It has the billionaire's attention and he is taking action. Stay tuned.
Karl Heckenberg will be the new CEO of Fiduciary Network if Emigrant Bank succeeds in acquiring the 25% it does not already own -- and failing that, he'll be a CEO of a leveraged buyout firm that will aggressively come after RIAs affiliated, or not, with the Dallas, Texas-based firm.
Heckenberg, 43, is poised to be the chief executive taking the reins from Mark Hurley, who currently heads the Dallas-based merger and acquisition business, wrote Barry Friedberg, Fiduciary Network board member and chair of the finance committee for Emigrant Bank in a letter to the editor sent to RIABiz that is posted at the end of this article.
Heckenberg came aboard initially as advisor to Emigrant's chairman of the board -- Howard Milstein -- and as a member of Fiduciary Network's board of managers just three months ago. The battle for control between Howard Milstein's Emigrant Bank and its operating partner of 11 years, Fiduciary Network LLC, helmed by CEO Mark Hurley came public after an RIABiz article based on documents based on an arbitration in the Southern District of New York.
"Whether Emigrant sells Fiduciary Network or starts a new finance company, Karl Heckenberg, who has spent his professional life in the wealth management industry and has been a Fiduciary Network director since October 2017, will be the chief executive officer of this category of business for us," Friedberg writes.
Repeated efforts over a few days to get a response form Hurley did not yield a comment as of press time. But the day after this story was published, Hurley offered the following response: “I won the arbitration unanimously last August and am not going to re-litigate it in the media We have a fabulous company with great people and great partner firms. We are growing rapidly and are continuing to do deals.”
Heckenberg responded: "We find it interesting that it took Mr. Hurley more than three days to respond. We find it even more interesting that he has not disputed in anyway our description of his actions."
One of the original RIA partners to Fiduciary Network is not so sure that Hurley is replaceable.
'Counting on him'
"We’re a mature, complex sophisticated profession," Harold Evensky, principal of Evensky & Katz/Foldes Financial Wealth Management says. "They’re not many Mark Hurleys out there. I know my universe really well and I know nothing about Emigrant. We count on Mark Hurley and continue to look forward to counting on him." Evensky & Katz, based in in Coral Gables, Fla., has more than $1.5 billion in assets under management.
Heckenberg worked during the previous two years at Lyons Capital Partners of Louisville, Ky. and, before that, four years as Charles Schwab & Co. vice president in the same city.
In an escalation of rhetoric and action in the battle between Mark Hurley and his financiers that burst into the public eye in a Nov. 8 RIABiz article, Mark Hurley battles to end his relationship with his billionaire investor, the bank owners took particular umbrage with Hurley's assertions of where power and control lies in the relationship -- namely with him.
Indeed, Hurley won an arbitration where a panel agreed unreservedly that Hurley's unilateral acts of power and control are welll within his power.
The arbitration may have given Hurley a reprieve but Friedberg maintains the ultimate control is in his company's hands. In his letter to RIABiz, he responds both to Hurley's comments and perhaps to the article's "Brooke's Note" above it.
"With respect to the comment in your article that Mr. Hurley has outsized control, it should be noted that all of the options are in the hands of Emigrant Bank. Emigrant Bank controls Fiduciary Network’s board, with five of seven board seats."
Freidberg adds that Emigrant has additional levers of control because the board serves as the investment committee reviewing all new loans and amendments.
Hurley claim: 'absurd'
The Friedberg letter also pounces on the Hurley assertion in the RIABiz article that Emigrant Bank is no longer large enough to serve as a backer of a Fiduciary Network as it goes after a higher volume of larger deals.
"Hurley’s claim that “we need a larger investor” is simply absurd," he writes.
Friedberg explains thast the largest loan in the Fiduciary Network portfolio is $23 million, and the legal lending limit of Emigrant Bank is more than 10 times that size. Emigrant Bank has more than $1 billion in capital, $7 billion in assets and a tier one ratio of approximately 20%, which ranks the bank as one of the most conservatively capitalized banks in the country.
"If Mr. Hurley were to originate $1 billion of loans over the next 12 months (versus $145 million over the last 11 years), Emigrant has more than enough capacity to finance this growth," Friedberg concludes.
It's an open question how Fiduciary Network's RIAs will react to a new leader who just arrived at Emigrant when their key man has been Hurley since the firm was founded in 2007. See: Mark Hurley's new report analyzes the pathology of the aging RIA and the illiquidity it exacts.
"We signed up largely because of Mark Hurley and we have a valuable business goal and feel the partners are doing a great job," says Evensky.
"I have no idea where the bank expects to get the expertise or knowledge that Mark and his staff have. Mark and Fiduciary Network have been extraordinarly supportive of us and have helped us become the valuable business that we are. There aren't many people anywhere the quality of Mark and his group. What the bank says is simply not credible. I would have a lot of reservations if anyone was taking over."
RIAs contact Heckenberg
Heckenberg says Emigrant Bank is confident of its relationship with RIA partners in Fiduciary Network.
"Irrespective of Mark Hurley's conduct vis-à-vis Emigrant, we certainly hope and expect that he has developed good relationships with all of our
partner companies. Based on our experience in our numerous operating units, we have a proven track record of keeping our partners and their clients satisfied. I have been contacted by a number of the portfolio firms and all of them are looking forward to working with us. I joined Emigrant because of their standards of excellence and dedication to serving the RIA space."
He adds that Milstein has hands on experience owning an RIA, including Chicago-based HPM Partners, which manages $6.2 billion of assets. HPM stands for Howard P. Milstein.
Heckenberg does have both advisor and M&A chops. He started his career nearly 20 years ago as an advisor at A.G. Edwards and moved to the Wells Fargo Private Bank division. Heckenberg also served as a vice president at Charles Schwab & Co. Inc.'s retail group. Most recently, he was executive vice president at Lyons Capital Partners where he was responsible for M&A at Hilliard Lyons in Louisville, Ky., responsible for the firm’s acquisition and growth strategy. focused on broker-dealer acquisitions.
Heckenberg joined Emigrant Bank Sept. 1 and joined the Fiduciary Network board in October.
M&A good to them
Hurley is currently listed on FN's website as chairman and CEO of Fiduciary Network, which he founded in 2006. He and Emigrant Bank, which owns 75% of Fiduciary Network, have been battling over its ownership.
Explaining the power play, Heckenberg says: “Emigrant likes the space and it’s been very good to them."
If Hurley gets fully bought out and a break-up fee is paid, then he will be out of the business but otherwise Hurley can, and says he will, set up shop across the street unencumbered by a noncompete covenant.
But Heckenberg says he is prepared to compete - encouraged in part by John Copeland's success in parachuting out of AMG. See: A year after John Copeland came to AMG with blue-ocean RIA growth plan, the publicly owned asset management giant spins him into new venture.
“It’s a big space. When you look, there are a number of entrants in the space. You’ve got John Copeland, and there are so many new entrants. I think that everyone thinks they’ve got the better mousetrap but it’s a relationship-based business. There are a lot of great firms out there. Emigrant Bank is very interested and feels the affiliates are complementary to this business and something they continue to do.”
Unusually long marriage
The divorce between Hurley and Emigrant Bank is made more bitter because the length of the union was unusually long, says Steve Levitt, managing director of Park Sutton Advisors LLC in New York.
“Emigrant Bank has been a permanent capital source for a very long time and that’s very different. Most PE groups invest just five to seven years and that wasn’t the case here," Levitt says.
Whether familiarity bred contempt or other emotions, the Hurley ouster will be of particular interest to the RIA community because Fiduciary Network was the first to bring the Barbarians at the Gate leveraged buyout method to the RIA space.
“They were the first group to make these long-term permanent capital investments and now there are many others doing it but they were among the first," Levitt says.
Unlike the book about the hostile takedown of RJR Nabisco, however, these Fiduciary Network LBOs are friendly and in fact tend to be hands-off injections of capital earmarked toward cashing out old owners and putting equity in the hands of the succeeding generation.
The judicious melding of financial engineering and human capital engineering was largely orchestrated by Hurley, which is why observers are somewhat taken aback that he is being cut loose.
"The management team has been doing these deals for 11 years and has a lot of relationships in place. It won’t be so easy to replace them," Levitt says. “I think it will be challenging. The FN team has a track record. I don’t know how one person is going to replace a team that’s been doing this for 11 years and I believe they’ve worked together for 20 years.” See: Mark Hurley's comeback to Veres: Fiduciary Network is investing millions in wealth management businesses -- it's just that few in the industry make the grade.
No u in team
Heckenberg says in an interview that he won't be replacing Hurley per se but act more as point man for New York Private Bank and Trust, which owns Emigrant Bank
Heckenberg says more leadership can be better.
“I think when you get back to that team concept, they’re getting a better partner. When you look at differences between firms like Dynasty or HighTower, they’ve all been able to bring together a lot of quality people to help them grow businesses and really be able to bring together a lot of quality people to help them," Heckenberg says.
That said, for many people HighTower is known as the company of Elliot Weissbluth and Dynasty Financial Partners is known as Shirl Penney's company.
(Thomas H. Lee Partners recently made a big investment in Chicago-based HighTower Advisors LLC, with certain existing institutional investors cashing out their equity interests. Last summer, New York's Dynasty Financial Partners LLC won the account of yet another $1-billion-plus breakaway team and its first poach from Goldman Sachs & Co. See: Dynasty Financial wins its first Goldman Sachs team -- a Schwab RIA now with $1 billion of UHNW advised assets.)
Regardless, Heckenberg says, firms like Fiduciary Network have lost leaders like Hurley -- and their management teams -- and do just fine.
“It will still continue to exist. Personalities do matter. When you look at Focus Financial, the people who are closing the business are often folks other than Rudy and his team. People join HighTower not just because of Elliot but because of all of the people. The bank is sophisticated group of investments and management. When you pull all of those resources together, and someone who understands the space like myself, I think as a group, we can do well."
Asked whether Heckenberg plans to keep on any of the Fiduciary Network management team, he is noncommittal.
“I can’t say, That’s a question that goes far beyond me,” he says.
Hurley did not respond to several attempts to reach him for comment for this article.
But court documents portray a toxic relationship between Fiduciary Network management and EB executives, with FN staff quoted numerous times saying they want to part ways with Emigrant and felt they were "underpaid and underappreciated."
Jeff Spears, who formerly headed up Sanctuary Wealth Services LLC in San Francisco, says both management and Emigrant Bank could face future challenges with their new partners.
“Here’s my analogy. If you get remarried, you’ll probably get divorced for the same reasons you got divorced the first time.”
Spears points out that it’s common for deal making leaders like Hurley and financiers such as Emigrant Bank to have different approaches and philosophies. “You’ve got the money people and you’ve got the deal people and they’re different. And, usually, they’ve got legal documents that protect them both.”
That's fine in theory, but reading the blow-by-blow descent into discord and distrust memorialized in the court documents is another matter.
“It makes me so uncomfortable to even read it,” Spears says. It is so uncomfortable for us to read this but they do this kind of stuff everyday.”
Evensky admitted that arbitration report shocked him. "It was kind of disturbing. Everything that Mark has ever told us has been straightforward and according to the arbitrators' panel, it was very straightforward decision."
Who do you trust?
For years, Hurley maintained that only he and his management team were competent enough to oversee these complex deals. And, for the most part, Emigrant owners have in effect agreed. Court documents show that Emigrant executives originally wanted to keep Hurley at the helm.
That ship has sailed, however, and Heckenberg asserts that he and Emigrant are up for the job even as he implies that Hurley might not be.
"As we've started to see what things look like and we've got a lot of functions, such as legal, we've realized we can do this and we've also had a lot of education. A lot of it is education. Talking to other players in the space, once they realized other firms are doing a very similar thing, everyone started to get comfortable. Mark has done a good job building the business. As they've gotten more educated on the business over the last year, the thinking has changed and evolved and at some point you ask yourself, at what cost."
Heckenberg is confident that with the backing of Milstein and Friedberg, his firm can provide ample assistance to advisors.
"They've got a number of businesses that touch independent financial advisors. They do a lot of white-label services for independent RIAs," Heckenberg says.
Letter to the editor
Brooke's Note: We published Mark Hurley battles to end his relationship with his billionaire investor on Nov. 8. On Nov 12, Barry Friedberg sent us this response, which we print here unedited and in its entirety.
To the Editor,
I am writing to provide additional detail in response to your article of November 8, 2017 regarding the relationship between Emigrant Bank, which owns 75% of Fiduciary Network (FN), and Mark Hurley. This is a complex situation, and we feel it is important that the industry understand the circumstances surrounding the dispute. We also want to reinforce our bank's ongoing commitment to the future of Fiduciary Network (FN), and to providing financing to independent advisory firms for internal succession, growth, and other strategic transactions.
There is general agreement about most of the facts we rely on in this matter. They can all be found in the transcripts of the recent arbitration, and in the bank’s filings with the federal court in New York. This record shows that Mr. Hurley, apparently deliberately, concealed important information from the FN board and Emigrant Bank at the same time he requested the bank waive its call option (as described in a section of your article that is quite appropriately entitled “SHH”).
Mr. Hurley was quoted in your article as saying “this was just a normal dispute between two partners,” thereby giving new meaning to the word “normal.” As described below, Hurley was in the market with a brochure we knew nothing about, trying to sell the bank's 75% ownership position. He apparently deliberately concealed the brochure and the details of this effort (any information he did give us was misleading and deceptive when compared to what he actually was doing). The arbitration panel effectively acknowledged that he was not disclosing these facts when, surprisingly, it concluded that under Delaware law, Emigrant Bank somehow bore the responsibility to extract more details from Hurley.
Consider the following: Mr. Hurley, at the expense of Fiduciary Network and without the authorization of the Fiduciary Network board, diverted substantial corporate resources to seek a partner to back him personally to buy Emigrant Bank’s ownership in the company. This initiative was undertaken without the bank’s knowledge or consent. In this undertaking, he apparently deliberately concealed his activities, including the preparation of a 70-page offering document, seven years of projections, and the proposed term sheet for a new employment agreement for himself. He then proceeded to call on Abu Dhabi Investment, Mubadala, Cranemere, Blackstone, Cynosure, Temasek, Pritzker Organization, and others, attempting to sell the bank’s 75% ownership. We did not know he was in the market offering the bank’s ownership, as he neither told us nor showed us the offering memorandum.
Separately, Mr. Hurley received an unsolicited inquiry from Invus, a Belgian family office, about their possible interest in investing in Fiduciary Network. Without informing FN’s board, Hurley seized what was clearly a corporate opportunity for, in my opinion, his personal benefit to negotiate a possible deal with a new contract for himself, without advising the Fiduciary Network board that he had received this unsolicited call. In the corporate world that I have served for 45 years as an investment banker and advisor to many boards, it is my opinion that chief executive officers are subject to dismissal for this behavior.
The arbitration panel, with knowledge of these facts, concluded that Hurley had no duty under Delaware law to share with the Fiduciary Network board the information that he had collected at the expense of Fiduciary Network, and that the burden was somehow on the board to ask questions that might have revealed his secret plan. Hurley, for example, was telling the bank consistently that he was getting no traction with potential investors. In order to penetrate this stonewall, we would have had to ask Hurley: “Have you seen any of these investors with whom you are getting no traction three or more times?” or "Have any of these investors with whom you are getting no traction been discussing the possibility of doing due diligence and visiting our portfolio companies?”
Hurley had received a limited mandate from me to educate a small group of sovereign wealth funds and family offices about the company in the event that there was to be an auction. I made it clear in writing that we would not be receptive to a management-led buyout and Hurley had committed to me in writing that he would show me in advance any management buyout proposals that he might use. In this context, apparently, I would have been required to ask a strange question: “Notwithstanding the fact that I told you that we were not receptive to a management buyout proposal and the fact that you agreed to show me in advance any proposal before you used it, have you, in violation of our understanding, prepared a management buyout proposal and shared it with potential investors?”
The bank’s legal advisors -- and our common sense -- disagreed with the panel’s application of Delaware law in this case, and we have appealed the decision. Whatever the outcome of this issue, Mr. Hurley‘s standards for dealing with his sole source of capital stands as described above.
Some other points to consider:
- The 2016 Compensation Dispute: Mr. Hurley wanted bonuses for himself and the employees, which we agreed to. But Mr. Hurley insisted that he would not agree to make the payments he was requesting if those payments were deducted in accordance with the LLC agreements from profits when computing the bank’s purchase option price. He attempted to strong-arm us to amend the original deal with threats that the employees would quit unless payments were made in the fashion just described. The original LLC agreement provided for a carried 25% profits interest and equity interest for the employees. Therefore, the only constraint on the value of the carried interest was the ability of the management team to originate good loans. In round numbers, the bank provided $235 million of cash to Fiduciary Network, of which only $150 million has been invested as of this date, leaving $85 million on hand. The Investment Committee of FN, of which I am a member, has approved every single transaction presented by Mr. Hurley. We have, therefore, done nothing to limit his ability to build Fiduciary Network and increase the value of his carried interest.
- Hurley’s claim that he needed “a larger investor”: Mr. Hurley, in explaining why he had put Fiduciary Network, its people, and its portfolio in play told RIAbiz, “we need a larger investor.” Allow me to put that comment in context. Mr. Hurley and his Fiduciary Network team have made $145 million in loans over the last 11 years, including both independent financial advisor and next generation loans. The board of Fiduciary Network, on which I serve, has approved every loan that Mr. Hurley has proposed. Therefore, the board cannot possibly have been an impediment to the growth of the company. The largest loan in the portfolio is $23 million, and the legal lending limit of Emigrant Bank is more than 10 times that size. Emigrant Bank has more than $1 billion in capital, $7 billion in assets and a tier one ratio of approximately 20%, which ranks the bank as one of the most conservatively capitalized banks in the country. Moreover, the bank has a robust Internet deposit platform on which we have been able to raise several hundred million dollars per month when it was attractive for us to do so. If Mr. Hurley were to originate $1 billion of loans over the next 12 months (versus $145 million over the last 11 years), Emigrant has more than enough capacity to finance this growth. Hurley’s claim that “we need a larger investor” is simply absurd.
- Emigrant’s Willingness To Pay A Premium to Resolve the Issue: In November 2016, we estimated that the auction value of Fiduciary Network was $70-$80 million. This represented more than a 50% premium to the book value of the loan portfolio, the yield of which was sensitive to changes in the public securities market. This would have valued management’s ownership at $18-$20 million. We offered to pay to management the bank’s call option price of $24-$25 million at that time and told Mr. Hurley that we were prepared to pay that premium to avoid legal, investment banking, and break up fees. Emigrant was also contemplating that any dispute might disrupt the business for a year or more.
With respect to the comment in your article that Mr. Hurley has outsized control, it should be noted that all of the options are in the hands of Emigrant Bank. Emigrant Bank controls Fiduciary Network’s board, with five of seven board seats. The board serves as the investment committee reviewing all new loans and amendments. If the highest cash bid for 100% of the company is attractive to us we could elect to sell our ownership and still remain active in the IFA space by capitalizing a new finance company. If the bid is not high enough, the bank will exercise its right of first refusal to match the bid and buy out Management’s ownership. As a result, Emigrant has control of events until such time as the bank might choose to sell our ownership.
Whether Emigrant sells Fiduciary Network or starts a new finance company, Karl Heckenberg, who has spent his professional life in the Wealth Management industry and has been a Fiduciary Network director since October 2017, will be the chief executive officer of this category of business for us.
While we are shocked and disappointed by Mr. Hurley’s conduct, Emigrant remains committed to its IFA Partners and helping them grow their businesses any way that we can.
Barry S. Friedberg
Fiduciary Network Board Member
Chair of the Finance Committee, Emigrant Bank
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