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New guard, old guard: Neuberger's CEO, George Walker (left), with top portfolio manager Marvin Schwartz

FORTUNE -- The asset management business isn't the bastion of stability it used to be. Long known for oh-so-reliable fees and enviable profit margins, traditional equity managers have seen clients stampede to alternatives as the stock market stalled for a decade. They've lost customers to everything from low-cost ETFs to emerging-markets funds, and their stock prices reveal the effects: AllianceBernstein's (AB) shares have swooned 84% from their peak; Legg Mason's (LM) have tumbled 75%; and Janus Capital's (JNS) are down 70%.

Now imagine grappling with those forces while being buffeted by the largest bankruptcy in history. That was the plight of Neuberger Berman, a venerable New York firm known for its mutual funds and wealth management group, when it got swept up in the epic collapse of Lehman Brothers in 2008. Lehman had purchased it five years earlier, and even though Neuberger retained its own name -- and was, in legal terms, insulated from the bankruptcy of its parent -- it couldn't avoid the stench. Clients fled as news reports lumped Neuberger in with its fallen owner. It didn't help that many client materials still described Neuberger as "a Lehman Brothers company." Or that the financial system briefly seemed on the point of implosion.

Fear and a sullied reputation weren't the only problems. Lehman handled Neuberger's back office functions. In the weeks after the bankruptcy filing in September 2008, those functions were divided among Barclays (BCS) (which bought Lehman's U.S. investment bank), Nomura (NMR) (which acquired the international capital markets businesses), and the Lehman "estate," the leftover assets that would be picked over by creditors during the bankruptcy. Neuberger suddenly had to strike emergency arrangements with three different entities to gain access to its trading and business data. It took months before it was able to compile a daily statement of its profits and losses.

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It's a miracle that Neuberger survived. And since it shed the millstone of the bankruptcy, it has sprinted forward. Revenues increased 14%, to $1.1 billion, last year, and it generated $261 million in profits. By any measure the firm is thriving.

Neuberger's comeback is a story of redemption. But it's not without its paradoxes. The company that lived through the Lehman disaster, now majority owned by its employees, is led today by a former Lehmanite -- albeit one whose sterling pedigree includes success at Goldman Sachs (GS) and bloodlines that have produced two U.S. Presidents.

More surprising, Neuberger is pursuing the bold expansion strategy once undertaken by Lehman itself. Previously focused domestically, Neuberger has launched into international markets like China and Australia, easing its dependence on wealthy clients and U.S. stocks. Following the strategy of a famously failed investment firm sounds like a disaster in the making. But here's perhaps the biggest surprise of all: It just may be the right plan for Neuberger.

Neuberger Berman's history dates back to 1939, when the firm began managing assets for the wealthy; it later became one of the first to offer a no-load mutual fund. But Neuberger wasn't a firm so much as a loose confederation of portfolio managers. The company provided distribution and back-office functions in exchange for a cut of revenues.

Managers were fiercely independent. Not only did they chafe at any notion of centralized control, they also bridled even at the idea of listening to outside experts. Founder Roy Neuberger once said he'd never hire an economist because then he'd have to listen to him. (The urbane Neuberger became known as a patron of modern art. He was an early buyer of works by the likes of Jackson Pollock, and his firm was noted for its collection. Neuberger came to the office every day till he was 99 and died in 2010 at age 107.)

By the turn of the millennium, Neuberger Berman managed $50 billion, divided between two old-line businesses: serving wealthy New York families and operating mutual funds that invested in U.S. stocks. That said, the firm wasn't so old-line as to resist the allure of cash. In 1999 it went public, which in turn exposed it to the possibility of being acquired. In 2003, Lehman came knocking. Some Neuberger managers were wary. Lehman had a reputation as a fast-money operation, and it had melted down in the past. CEO Dick Fuld wielded more power than Neuberger's prickly, go-it-alone managers were comfortable with. But those doubts succumbed to Lehman's $2.6 billion bid, and many Neuberger managers got rich.

At first the corporate chemistry looked promising. Lehman was happy because Neuberger required little capital and its fees provided dependable earnings. Equally important, the acquisition lifted Lehman closer to the elite crowd it had always aspired to join: diversified global investment banks like Goldman Sachs and Morgan Stanley (MS). For its part, Neuberger benefited from new customers ushered over by Lehman's brokers. Neuberger's assets doubled from $50 billion in 2003 to $102 billion in 2006.

But Lehman's desire for centralization and fast growth clashed with Neuberger's need to go its own way. In particular, Lehman wanted more control as it amped up the institutional money-management business. Neuberger's top two executives were replaced, rankling the old guard. "Neuberger was a production culture -- make money, make clients money -- and it was very light in terms of top management meetings," says Gary Kaminsky, formerly a Neuberger portfolio manager and today a CNBC host. "Then Lehman put in layers and layers of bureaucrats who didn't produce revenues. That was a major tension point." Some Lehmanites even encouraged Neuberger managers to rely on Lehman's economic forecasts. No way, they responded.

Tensions flared again when Lehman tried to move Neuberger out of its dowdy offices on Manhattan's Third Avenue and into a Lehman building. "The old guard shut it down," says an ex-Neuberger employee. Neuberger's offices had been on the East Side for years, and many managers resided nearby on the Upper East Side. The idea of a crosstown commute was anathema.

In truth, some at Neuberger just didn't cotton to their corporate parents. "They had a sore feeling like, Why do I have to be associated with Lehman?" says the former employee. Some Neuberger managers groused about receiving half their salary in Lehman stock. That concern, of course, would soon be justified.

On June 9, 2008, Lehman announced a $2.8 billion quarterly loss. Fuld began exploring ways to raise cash, including a sale of Neuberger. He turned to George Walker, a rising star at Goldman Sachs who had been hired two years earlier to run Neuberger and the rest of Lehman's asset management division. Walker had a gleaming reputation. He'd been one of the youngest partners ever at Goldman, grasping the golden ring at the tender age of 29, and rose to oversee its $70 billion alternative investments business.

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By August 2008, Walker was negotiating to sell Neuberger to private equity firms Bain Capital and Hellman & Friedman. The two sides were close to a deal when Lehman suddenly filed for bankruptcy on Sept. 15.

Chaos ensued. Lehman lawyers and advisers immediately began triage. The investment bank was the most vulnerable to employee defections, so it was quickly sold to Barclays. With its teams of portfolio managers who could easily leave, Neuberger was the next focus. Clients representing billions of dollars were departing.

Neuberger needed a quick sale to relieve the uncertainty. On Sept. 29, Lehman's advisers agreed to a $2.15 billion purchase by Bain and Hellman. Relieved portfolio managers stopped planning their exits, client defections slowed, and Neuberger's name dropped from headlines.

But it wasn't actually a done deal. Bain had tied the purchase price to the S&P 500 index (SPX) -- and it was falling fast. "Every day their price ticked down," says Lazard's Barry Ridings, then co-head of his firm's restructuring team, who worked for the Lehman estate.

Lehman's team hit upon the idea of a management buyout. The tricky part was finding the money to pay for it. Neuberger's managers had lost huge sums when Lehman's stock cratered. The solution: Neuberger would issue preferred shares and own 51% of the company's common stock, with the other 49% remaining with Lehman's creditors. The preferred shares paid an escalating dividend, rising from a yield of 4% in 2009 to 10% in 2011, intended to induce Neuberger to retire the shares as quickly as possible. On Dec. 22, 2008, a bankruptcy judge approved the bid -- worth about $920 million -- over Bain and Hellman's offer, which by then had fallen near $750 million. Neuberger was private again for the first time in 10 years.

But this Neuberger incarnation differed dramatically from its independent predecessor. It was now bigger and more diversified. It consisted of almost all of Lehman's asset management division, including a fixed-income firm in Chicago called Lincoln Capital; a private equity operation called Crossroads; and a funds of hedge funds business. Today, the newer operations account for about $100 billion -- half of the company's assets.

If you want to grasp the difference between the old Neuberger and the new, sit down with its CEO, Walker, and its legendary top portfolio manager, Marvin Schwartz. The CEO's full name is George Herbert Walker IV. He's a second cousin to George W. Bush and part of the family's St. Louis branch. Walker's great-grandfather founded a securities business that became part of Merrill Lynch and later created the Walker Cup golf tournament. Walker, 43, is tall with a head of thick, well-combed sandy hair. He's got an undergraduate degree and MBA from the University of Pennsylvania's Wharton school, and a reserved, patrician air. He cringes when asked about himself.

Then there's Schwartz, 71, who looks like the person you'd create if you had set out to design the antithesis of Walker. Compact, with a shine on the top of his pate that suggests hair hasn't been seen in the vicinity for some time, he is the son of a Long Island gas-station owner, graduated from a local school (Baruch College), and has been at Neuberger for 51 years. Loud and blustery, he casually offers that he considers himself as good an investor as Warren Buffett.

Don't let the exteriors fool you. Walker, for one, can be audacious in terms of his strategy. He actually began Neuberger's foreign expansion while overseeing the unit at Lehman. (Lehman's overseas operations were comfortably profitable; it was disastrous real estate bets that felled the company.)

Walker's idea has been to combine Lehman's and Neuberger's former parts into a one-stop shop that can serve any type of investor. Its private equity business can manage a slice of a client's assets, while a New York portfolio manager picks U.S. small caps for another share and its Hong Kong team handles another portion.

The strategy isn't inconsistent with Neuberger's history. The portfolio managers use the same approaches to manage money for institutions as they do for wealthy clients. But it is shifting power away from old-guard portfolio managers like Schwartz, whose long-term record justifies his swagger. Over the past 22 years Schwartz's group has averaged 10.2% returns after fees, easily beating the S&P 500's 8.2% annual return.

Schwartz is still Neuberger's best-known investor, revered on Wall Street as a brilliant value investor, but his role in generating Neuberger's bottom line is diminished. And he acknowledges as much. More important, he expresses enthusiasm for the new Neuberger: "We have a PE business, which has been outstanding since day one. That's something that Neuberger never had. We have the fixed-income business. That's turned out great."

Neuberger is building its institutional money-management unit. That's a virtue. But a new customer base is also a necessity after a decade-plus of meager stock returns. Neuberger's mutual fund assets have barely budged in 12 years. In 2000 they totaled $20 billion; today they're $24 billion.

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The need to diversify is also helping drive Neuberger abroad. The company, which had no presence outside the U.S. a decade ago, purchased Lehman outposts in Asia and Europe, in many cases rehiring the Lehman staff, which focused on institutional money management. Today, Neuberger has 13 offices in cities like Shanghai, Singapore, Melbourne, and Tokyo.

Neuberger's European business has more than 200 clients, up from 35 in 2008, and non-U.S. assets climbed by $8 billion last year as U.S. assets fell by nearly the same amount. The international push has driven Neuberger's 14% annual revenue growth since 2009.

The big international footprint is unusual for a firm of Neuberger's size, which Walker admits "frankly speaks to our former corporate parent that had great big dreams." Analysts say a push for international assets has never made more sense. "These sovereign wealth funds have a lot of money to invest," says Sandler O'Neill analyst Mike Kim. That said, institutional investors also demand lower fees and are more likely to fire managers when they trail a benchmark index by 0.1%.

That's a new challenge for Neuberger, but Walker thinks the company can handle it. As profits have flowed, Neuberger has paid off the preferred shares that funded the buyout, and, little by little, it has been purchasing the stakes held by Lehman creditors. Neuberger's employees expect to own 64% of the company by year's end and 100% by March 2016. Whatever the challenges are, this time they plan to handle them on their own.

This story is from the October 8, 2012 issue of?Fortune.

Source: http://finance.fortune.cnn.com/2012/09/26/neuberger-berman-lehman/

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