Mike Freno – Confident Humility at Barings (EP.374)

0:04Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators .com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

0:44Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. My guest on today's sponsored insight is Mike Frino, the chairman and CEO of Bearings, a $400 billion global manager that invests across public and private fixed income, real assets, and capital solutions on behalf of its insurance company, Parent MassMutual, and other institutions. Bearings emerged from a combination of four investment brands in 2016 and has expanded its capabilities by acquiring partners with complementary skills that fit into its culture. Our conversation covers Mike's path to the CEO seat, the creation of the modern Bearings, the power of insurance ownership, and lessons from leading, acquiring, and integrating asset managers.

1:41Please enjoy my conversation with Mike Freno. Mike, thanks so much for joining me. Absolutely. Great to be here. Why don't you take me through the path that brought you to this seat at Leading Bearings? I was a graduate from Furman University as an accounting major and started out at what was the legacy Coopers and Libran's. I'm dating myself a little bit. Shortly after joining there, I became BWC. I was in audit for a couple years and quickly determined that that wasn't how I wanted to make a long -term career. Learned a lot though, wouldn't trade it and actually have recommended to my kids that they pursue an accounting background.

2:21It did a lot. It just wasn't for me. So I'd moved over to the tax side and then determined that wasn't probably the best fit for me either. And then had an opportunity to go work at a small startup hedge fund as the controller. And when I say small, it was about five of us. We had some success and had a lot of growth. And what happens with small companies that grow is you start to wear a lot of different hats. And that really gave me the opportunity to get out from just doing accounting work, but still using an accounting skill set to start doing underwriting on companies. I started to trade and really my focus was around distressed debt.

2:57So I was able to focus on fundamental cash flows, things that were near and dear to what I did like, which was looking at financial statements, going through Ks and Qs and analyzing a company and building a company from that standpoint. So that ran me through to 2005 and then had an opportunity to come to what at the time was Babson Capital, which was one of the predecessor companies to what we are now, Barings. I came over to the high yield side, managed portfolios, started to move into various roles, ran the U .S. high yield group, formed the global high yield group, which was one of the first of its kind at the time, and then ultimately had some more responsibility over other investment teams and then was fortunate enough and certainly humbled to be put into the role that I have now of chairman and CEO of Bearings in 2020.

3:45Barings as an organization has a very long history. Would love to hear the history and how that's evolved to what Barings is today. It's well over 100 years old. The name, certainly, it was originally a merchant bank way back in the day. What we are a part of was really the asset management business within the bank. We are owned by MassMutual, so we are owned by one of the Fortune 100 life insurance companies. The start of what became this separate asset management business was, at the time, quite innovative because traditionally you had insurance companies who had captive capabilities within the insurance company.

4:25And the management team at MassMutual in 2000 thought that there's no reason that we can't take this show on the road, so to speak. Not only just have capabilities to manage money for the general account, but why not manage it for third parties as well? And that would ultimately benefit the policyholders, not only by providing returns for the general account, but then also having an earning stream that's from third parties. And so the business was then spun out. The team that was part of MassMutual Investment Management, for the most part, was spun out into Babson Capital. And again, that's commonplace now.

5:01If you look around at a lot of our competitors on the insurance side, they either, in many cases, are owned by asset managers or asset managers are owned by insurance companies. taking the same thing. But back in 2000, there just wasn't many people doing that. So I think that speaks to a little bit about the innovation in the way that we as an overall enterprise, both Barings and MassMutual, think about the opportunity set that exists. So that was Babson Capital. And then over time, MassMutual had acquired other brands. So it did buy Barings from ING in 2004. Barings itself was established in 1762.

5:41So MassMutual is old, Barings is much older. But we purchased the asset management piece from ING, who had purchased it when there was the crisis out in Asia as it related to the Barings Bank. We then made a series of other acquisitions, a group that was called IDM, which was Institutional Debt Management, which was a group that managed CLOs and leveraged loans. That was in the US. We bought a group out of Duke Street Capital a few years later to complement that. So we had a US capabilities. We then had European capabilities. And through that, we just bought a lot of things as a roll -up. MassMutual owned five asset management brands, so they were effectively running a multi -affiliate model.

6:22The five brands were Babson Capital, which was what I was a part of and was largely a fixed income group that was institutionally focused. There was a group called Wood Creek, which was really a real assets private equity business. And then there was a group called Cornerstone, which was our real estate debt and equity business. And then finally, there was Bearings, which was the international equities and multi -asset focused business. In addition to that, there was Oppenheimer Funds. The decision in 2016 was to combine four of the five brands. So everything I mentioned, with the exception of Oppenheimer Funds, were to be merged under the new name of Bearings.

7:02Babson was actually the largest from an AUM standpoint. And largely speaking, it was the Babson management team that was running the company thereafter. But we did take the bearings name because we felt it had more recognition and it was better known throughout the industry and certainly better known in our client space. And that's really what formed bearings as it is today and the $400 billion that we are today. How do you describe bearing strategy across what you're doing? What we've done recently is form a strategy statement that's relatively succinct and talks about what we do and who we do it for.

7:38We don't do everything for everyone everywhere, but we look at our clients as institutions, insurance companies, and intermediaries, and what we do for them are fixed income, both on the public and the private side, real assets, which includes not only real estate, but also infrastructure equity and real asset strategies on the private equity side, and then capital solutions, which is really a broader state too. I mean, capital solutions can be portfolio finance lending. It can be a structured equity component for providing liquidity to a fund investor. That's how we bucket the three capabilities that we do.

8:15Some of them overlap, but we've tried to say to clients when we sit down, these are what we do. That set of capabilities has similar variations of a theme flavor of what that risk is starting with that fixed income DNA and real estate and real assets compared to say like venture capital. I'm curious how the insurance company as a parent influences and thinks about risk and investing. Most of us have a heritage in fixed income. So there's a mindset of downside protection. One of the things I learned pretty early on when I started looking at credit is credit is one of the asset classes that works for you 24 hours a day, seven days a week.

8:54you're accruing a coupon all the time. So if done correctly and minimizing losses, there's great returns to be had, but you do have to sometimes move down the risk scale to find more attractive returns. And sometimes you get things with distressed and other alternatives to capture some capital appreciation. That's the way we look at real estate, but we do have a very skew for the majority of things we do is really a cashflow generating type investment. We complement that with our private equity capabilities and our fund investing, but certainly given our DNA and heritage coming from an insurance company, which we're a mutual company, our policyholders are the ultimate owners of the company.

9:34They're looking for stability. They're looking for a growing dividend. And that really ties nicely to having a portfolio that is predominantly skewed towards fixed income type investments. What are some of the other aspects of having an insurance company as a parent that permeates the organization? I think it is one of the best, if not the best, ownership structures. Being owned by a mutual company, we're able to build our private credit and our EM business in 2013. That was relatively early. It's become something now that folks are looking at. Again, I think it speaks to not only the willingness and the mindset of the overall enterprise, both at Barings and MassMutual, to be looking ahead and seeing where the trends are going to go, but we started building that direct lending business in 2013.

10:23And we were able to do that and be early because we can take a longer term horizon. We're not looking at quarterly. We're not looking at annual type things. We're saying, what's going to be in the best interest of our stakeholders a decade from now? We have policies that sit at MassMutual that are 80 years old. So they're not just concerned with what we're doing today and tomorrow. What they really care about is, are we going to be there to meet their needs decades from now and generations from now? And so that mindset really allows us to take a long -term approach to things when you're building a business.

10:55And I think it has benefited us tremendously in being able to be ahead of the curve and be patient. We're disciplined with things. There's things we've certainly done that haven't worked out that we've moved away from. But generally speaking, if we think there's a trend in the future, we have the ability and we have the support of a capital base to be able to make investments for the long term. So across asset management, there's always this complementary nature between trying to pursue an investment opportunity and trying to build the business. Where does that balance trade off in taking something like looking in 2013, you're going into a new business line?

11:31How do you think about that from your seat? I've always viewed management's job, so my job now, to really live in the future. What is going to allow us five years from now to be as well positioned as we are today? But what we're doing today and the success we're having today was really a result of what was done five plus years before that. If you're managing portfolios and our portfolio managers, they've got to be looking day to day on those types of things. That's a different mentality from taking the longer term, but that's where the management side of things has to stay. Look, we know that there's a trend moving on right here.

12:09And I think equally important is, does that fit your DNA? We are not everything to everyone everywhere. We think we do things very well. We think we have certain areas and skill sets where we've earned the right to compete with folks. But candidly, it's not everything. We don't have the size and scale to do everything. We don't have the expertise to do everything. So what I like when I get the opportunity to sit in front of clients, I show them what we do and it's broad, but it's not exceptionally broad. And I say, this is the portfolio of capabilities that we've built over time that we can demonstrate excellence to you.

12:45If you're looking for other things, that may not be us. We haven't built that out and we may never build those things out. At the scale that you are today, how do you think about the culture of the organization that differentiates any of those individual products from one of the competitors? I love the question on culture. We're in 20 different countries, and so culture is different in some of them. What is the same is our values and the way we treat one another and focus. I think what is core to us, and it's a characteristic that folks at Barings have heard me use a lot, is the confident humility.

13:19That's the way we want to approach each other, approach what we do every day. We have to be confident because we're managing large amounts of capital, but we also need to have a level of humility that we don't have all the right answers all the time. We may need to be reaching out to our partners internally to help us do things. That's really one that I've tried to instill. And I think we've done a really good job globally of approaching that. What are some of the other core values that you espouse regularly? It's respect. We run everything as a team -based approach. We have investment committees for all of our products.

13:53We don't have the star portfolio manager that a business is built solely around. We have incredibly gifted individuals, but they are so much more powerful working collectively and collaboratively than they are as individuals. That doesn't just work and apply to what we typically call the front office or the investment folks. This is something we have instilled across the entire organization, because I think one thing that asset management as an industry has discounted is the importance of building up your operations, investing in your technology, making sure the plumbing works all the time. You've seen it in other industries, too, where sales outpaces manufacturing and you get ahead of yourself.

14:36And so you've got to bring this along all the way. We've just gone through a three -year technology transformation, and we're just coming up on the end of it. Everyone was in this together. And when we set out, we said to everyone, everyone's going to get about 75 % to 80 % of what they want, which means you'll all be equally unhappy. But the good news is you're going to get 75 % to 80 % of what you want. And I think when everyone has heard that over and over again, and they said, okay, great, We know that this is the best interest for the business long term. It's been an incredible thing to work, but it's been stressful.

15:12As you can imagine, we're going from 30 plus systems to seven. When I talk to our board about it, it is the thing that I'm so proud to see this entire group of 2000 people all rowing in the same direction has been great. What have you learned about how to manage this large organization? I mentioned confident humility. One of the best things I learned early on was no one has all the right answers and you shouldn't expect yourself to either. But what you should expect is to surround yourself with people who will have those answers that you don't have. stepping into this role three years ago, you think you're ready for it until you get into the seat and you're like, wow, there's a lot that I don't know.

15:55And I was really fortunate to have an incredible team around me that I could say, okay, I feel good about 75 % of this stuff, but 25%, guys, you need to give me some advice. Give me your thoughts. Tell me where I'm wrong. Tell me my blind spots. I think transparency is probably one of the key things that we wanted to do out of the gate is to really share as much as we possibly could up and down the organization. Because I always felt early in my career, I would rather know something and know I don't like it than not know something and think I don't like it. And that just breeds anxiety into the organization.

16:32It reduces trust. And we want to give people information. If you can give them straight information, let them process it. And most times people, whether they like it or not, they're able to deal with it better. But when you don't know it and you suspect something, then it just makes things worse. So I've really tried to run on managing folks with giving as much possible information because it's not just me running the company. It's not just my leadership running the company. It's 2 ,000 people running the company. And the more information they can have, the higher degree of success we'll have.

17:05What are some of the ways that you took your own style and created the Mike Freno approach to how you're going to manage bearings? I have a fairly casual approach to it. I like to think I'm driven. I make decisions quickly. That's probably one thing that I've had to learn a little bit more of is I've always had a philosophy that we can always pivot. And I have a great team that pushes back on me at times that says, well, maybe we should slow down a little bit. I hope it is one where there is a level of shared respect, transparency. Our values aren't for everyone. There are other business models that work very, very well who don't look and act like we do.

17:44But for us, that's it. So I've had to learn to let go of a lot of things. I think that's probably one of the hardest things. Every time you move up in a new role is the things that you used to do, you should stop doing. and the reality is I should model what I expect other people to do and I should make fewer and fewer decisions as I move up the organization. I should make bigger decisions, more important decisions, but they should be fewer. And what I had to learn early on was to, when people would bring me decisions, often I'd have to look and say, I think that's something you can make. I would tell people when they first would report to me, if I had a new report, you're gonna make 10 decisions in a year.

18:26nine of those decisions I'll agree with 100%. One of them I may actually hate, but guess what? That's your decision to make, not mine. That's your decision and I'll support you because I trust you in that decision. And that's hard sometimes because typically these are things that you previously did or had a core competency and that you're now relying on someone else to do. It's not my job to make all the decisions. In addition to those pivots, what were some of those things you alluded to that you didn't know when you stepped into the seat? I don't make all the decisions, but every problem is now my problem.

19:01And that's hard too, because everything that goes off everywhere in the organization is now something I have to be concerned about. And the tendency to want to fix it, as a lot of folks do, is hard to resist. And so again, sitting back and learning that. But what I also wanted to make sure I didn't do, and I've seen a lot of people do this, is when you come from a certain line of business and everyone comes from somewhere where their skills are probably more skewed and stronger than others, is you have a tendency to gravitate back towards those when you're uncomfortable. When you're in that uncomfortable situation, you go back and go, maybe I'll sit down on the trading desk and start talking shop again.

19:42I had to pull myself away from that. I still do it, by the way, which drives them crazy. And folks that are out there today, if I get off this and just sit down and say, hey, what are we trading? They'll roll their eyes as they should. But that tendency to want to move to the things that are comfortable, what I had to say, look, I've got to start building muscles that I don't have, which means I need to spend more time over here. And I need to be listening more to my chief operating officer, my chief human resources officer, my chief financial officer. Okay, help me better understand what's going on in this part of the business.

20:12I'd love to turn a little bit to the business strategy. Over the last decades, really since this rebranded institution of bearings came to be, we've seen more and more consolidation. And you've gone through this as a roll -up in the process of acquiring an asset manager. What's worked? What hasn't? We are very much of the mindset that we want to fully integrate acquisitions. And that, to be honest, doesn't always work for principally owned businesses. And there are a lot of businesses that we've looked at where the principal at the time is saying, look, we want to continue to be a standalone entity.

20:48We want certain support, but we know how to run our business. Let's go run our business. And I certainly agree that they know how to run their business better than we do. But I think it's important for us from an M &A strategy to integrate things fully into the company, that everyone is all on the same page. And we've made two fantastic acquisitions recently. And I'd say fantastic, not because it's my genius, but the people we got were unbelievable cultural fits for us. We've just done two of them down in Australia. One was a real estate business and one was a securitization business. They were really a nice complement to what we had and will really serve as a foundation for us to build out those capabilities in broader Asia pack.

21:35One of them we, quote unquote, dated for two years to have this conversation of how comfortable with you being fully integrated. And that means fully integrated. Branding. Now, that doesn't mean we get involved in your investment process because you know that way better than we do. We don't say, hey, you got to do this. You keep running your investment business. But from an HR standpoint, from a technology standpoint, from all of those things, we want you to be part of this. And we want you to have the same culture as we do. We want that to match. This is a people business. We're a financial services company.

22:08There's no widgets that we make. There's no plants and manufacturing. Our assets are people. And people can be great at times. People can be troubled at times. And so if you don't get that cultural fit the right way, I think you set yourself up for failure. And so I learned with a number of things, there were times where we took a little bit too long and maybe weren't as insistent as we were in the integration. And so now the ones we've done recently, we've been very upfront and very transparent. This is what we mean by integration. And look, for a lot of folks, it's not what they want, which is okay, because there are plenty of businesses that have been very successful that have more multi -manager affiliate type models, and they've been able to be successful.

22:52It's just different from what we want to do at Barings. When you think about bringing in a manager and the organic growth potential, there are only a small number of asset managers of this scale you are. How do you organize that distribution platform so that it works for the fund managers doing what they're doing? We run a general sales force, which I believe is the right way to really get proper scale. We challenge ourselves all the time. Is having a specialist sales force the right way to go? just very difficult to get operating leverage and that scale if you're doing that because every asset class, if they wanna be in every region and they wanna be in all the countries we are, like it's pretty expensive, candidly.

23:34So we have run a model where we have a generalist sales force. And then behind that, we have client portfolio managers who are really the experts and the liaison between the investment teams and sales. But I think one of the questions is, how do you make sure that you're serving all the people that you have because they're inherently, and it's healthy at the right level, there is friction between sales and manufacturing, if you want to look at that way. I'm not getting enough sales time or no one's selling my product or my product's not selling as much because you're paying attention to someone else's product.

24:06That's a balance. I want a little bit of friction. I want a little bit of challenging to be like, hey, maybe we can do better, but it's all part of making sure your culture is there, that we're listening to one another, that we're being transparent, that sales is sitting down, showing the time that they're spending, not only with a particular team's products, but all the products. Let's show what we are doing. Maybe we are spending more time somewhere else. And then more importantly, probably than that even is what is the feedback we're getting from clients? Let's not just take that and keep it to ourselves, but let's go give feedback to our portfolio managers and say, look, this is what they think we're doing great.

24:43Actually, this is what we're hearing again and again that we need to improve on. It's really looking at it is saying, you are all part of this team. There is one bearings approach to this, and it's a rising tide. We've certainly seen that accelerate as a trend. In your case, it started on the insurance side, on the others are buying into insurance. What's so special about the insurance assets that have made that so desirable for asset managers? I think there's a couple of ways you look at it is insurance companies have an existential need for asset management capability. So there is a symbiotic relationship between the two because they take their premiums in and they need to invest those prudently to be able to not only meet the claims, but hopefully provide a return to, in our case, whole life policyholders.

25:29In many cases, it's a stable form of capital, which allows asset managers to grow their business because it is more stable than going with some other forms of capital to do that. So I think because there is a natural need for the capabilities within an insurance company, it helps the asset manager because it's a more stable, longer term form of capital. It makes a very, very nice relationship to build out capabilities with the purpose of then showcasing those capabilities to other third parties. I think that's a very nice balance for both asset managers and insurance companies. You mentioned earlier that a lot of your role now is to look at the future and would love to pick your brain on what some of the most important industry trends you're seeing and positioning for.