Wells Fargo & Co. plans to withdraw the capital from its affiliated hedge-fund firm, Overland Advisors LLC, as the asset manager seeks new investors, two people with direct knowledge of the matter said.
Wells Fargo, responding to U.S. curbs on risk-taking by banks, will withdraw about $150 million every quarter through the first half of 2014, said one of the people, declining to be identified because the move isn’t public. Overland manages about $2.1 billion, according to a two-page factsheet provided by Laura Fay, a bank spokeswoman. The fund is looking to raise $1 billion from outside investors, the people said.
“There is some seed money in there from Wells Fargo,” Chief Financial Officer Howard Atkins said in a Jan. 19 interview without specifying the amount. “Typically what happens is that seed money comes out after a period of time after the business grows, so I think of that as primarily a mechanism for third-party customers.”
Wells Fargo, based in San Francisco, will still collect income from fees charged to manage client assets once its capital is removed, Atkins said. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among U.S. banks breaking off or winding down proprietary-trading units to comply with a provision of 2010’s Dodd-Frank financial legislation that prohibits lenders from betting capital for their own accounts.
Overland was formed in January 2010 when Wells Fargo decided to move a proprietary-trading group out of the Securities Investment Group, run by John Shrewsberry, and into an asset-management division.
“This is keeping them at arm’s length,” said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Brothers. Wells Fargo is “anticipating this thoroughly and keeping a relationship that is a good benefit to them.”
Wells Fargo executives have said that proprietary trading was a smaller contributor to earnings than it has been for rivals.
“We believe the impact on Wells Fargo overall will be lower than the impact of our large bank peers, particularly in areas such as proprietary trading,” Chief Executive Officer John Stumpf said on a conference call in July last year, speaking about financial reform. Two months earlier, at the company’s investor day in May, he said “diversity in our business model and our lack of proprietary-trading activity creates high-quality, less-volatile earnings.”
Atkins said on May 19 that Wells Fargo, in integrating Wachovia Corp.’s investment-banking division, was “exiting equity proprietary trading, exiting distressed debt trading and correlation trading.” He didn’t mention Overland Advisors.
The rule against risk-taking by banks is named after former Federal Reserve Chairman Paul Volcker, who proposed it. Bank holding companies with federally insured deposits are barred from having hedge-fund and private-equity-fund holdings that account for more than 3 percent of bank capital or 3 percent of an individual fund’s capital. The rule, which became law in July as part of Dodd-Frank, also bans proprietary trading.
Overland is now part of Wells Fargo’s Asset Management Group, the business run by Michael Niedermeyer, Fay said.
“We are pleased to be able to leverage this internal investment talent to establish an affiliate focused on providing accredited investors access to a relative value strategy,” Niedermeyer said in an e-mailed statement.
Prior to the move, the proprietary-trading group managed about $4.3 billion of the bank’s capital. By the time the fund was launched, Wells Fargo’s capital had been reduced to $3.5 billion, one of the people said. The Overland Relative Value Fund started in March 2010, AR magazine reported in July.
The bank’s capital is held in a separate account from client assets, according to both people. At the time of last year’s launch, clients had about $204 million of assets invested, AR reported.
Uncertainty over passage of the Volcker rule and its impact on Wells Fargo’s ability to invest in the fund made it difficult to attract outside capital, said one of the people. Investors have shown an increased willingness to invest now that the bank has a plan to withdraw capital, the person said.
Wells Fargo is among banks including JPMorgan and Goldman Sachs that moved star trading teams into asset-management divisions as a way of retaining talent and preventing a total drain on profits, Charles Peabody, an analyst at Portales Partners LLC in New York, said in an interview.
Traders “had their upside capped and they were itching to make money, and so said, ‘Either put me in a place where I have an upside like asset management with a special structure or I’m going to go to private equity or start up my own fund,’” said Peabody, who wasn’t referring to Wells Fargo specifically. “You either have to say, ‘Okay go your own way,’ or you will have to structure something internally.”
In October, KKR & Co. said it planned to start a unit to invest in stocks with proprietary traders from Goldman Sachs after regulations spurred the investment bank to shed a team that made bets with the firm’s capital.
Overland Advisors is led by Gordy Holterman, 45, and Derek Dunn, 38, and employs about 11 people in the investment team, and 22 overall, according to the factsheet. The team had helped run an internal relative-value portfolio for almost a decade at Wells Fargo, said one of the people.
Holterman joined Wells Fargo in 2001 as head of financial products, and oversaw the internal portfolio since inception. Dunn joined Wells Fargo in 2007 and previously worked at D.E. Shaw & Co. LP and Man Group Plc-backed Marin Capital.
Overland Advisors is “involved in capital structure arbitrage, convertible arbitrage, event-driven, special situations and distressed strategies,” according to the LinkedIn page of Darrell Leong, who describes himself as an analyst. James Gifford, a portfolio manager, said he’s in charge of “U.S. equity-linked strategies, including convertible arbitrage & equity volatility,” according to his LinkedIn page.
The firm typically holds 80 to 100 positions “where there is an expected event catalyst or undervalued optionality,” according to the factsheet. It uses so-called quantitative strategies, or mathematical models, to trade securities, said a third person familiar with the firm.
Wells Fargo holds private-equity investments that may be subject to the new financial rules. The bank has backed Norwest Venture Partners, a venture-capital fund that manages more than $3.7 billion, and Norwest Equity Partners, with $4.6 billion.
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