TCW Ends Decade Under SocGen With Carlyle-Backed Buyout
Carlyle Group LP (CG) agreed yesterday to buy Los Angeles-based TCW in a deal that will give TCW’s management and employees a 40 percent stake. The transaction with Carlyle values TCW at $700 million to $800 million, according to two people familiar with the agreement, who asked not to be identified because the information wasn’t disclosed publicly.
“From the standpoint of TCW, the decade of Societe Generale’s ownership really wasn’t a helpful thing,” said Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island. “When you have institutional ownership, there are expectations that prompt you to run the business differently and it isn’t in the position to create incentives.”
The deal ends 11 years under the French bank’s ownership, during which the firm failed to keep pace with Bill Gross’s Pacific Investment Management Co. and suffered withdrawals and the departures of more than 40 employees when it fired top- ranked bond-fund manager Jeffrey Gundlach in December of 2009. Societe Generale, which bought TCW in 2001 for about $880 million and then added to its stake, took a 200 million-euro ($246 million) writedown in the second quarter and said it may have to make more adjustments when the deal closes.
The bank is selling assets as lenders across Europe seek to shore up their balance sheet amid the region’s sovereign-debt crisis and tighter capital rules.
Since being taken over by Societe Generale in 2001, TCW’s assets rose from $80 billion to a peak of $147 billion in 2007 before declining. By comparison, Pimco, which was co-founded by Gross in the same year that TCW was started and is now owned by Germany’s Allianz SE (ALV), has grown to $1.8 trillion in assets and manages the world’s largest mutual fund, the $263 billion Pimco Total Return bond fund.
Gundlach, who started DoubleLine Capital LP after being ousted by TCW at the end of 2009, has since gathered $40 billion in assets, almost a third of TCW’s total. The $30.4 billion DoubleLine Total Return Bond Fund has beaten 97 percent of peers in the past year.
Yesterday’s deal should help TCW put aside questions of ownership and turnover of key employees that hurt the firm in the past, said Elizabeth Nesvold, managing partner at New York- based Silver Lane Advisors LLC, an investment bank that specializes in mergers and acquisitions of asset and wealth management companies.
“When you’re in the institutional asset management world and there are rumors about being for sale, it puts you in the penalty box with a lot of gatekeepers,” Nesvold said. “The shackles are off for TCW.”
The relationship between Gundlach and TCW started to sour with Societe Generale’s acquisition, when Gundlach said his stake in the fund company fell, according to court transcripts. Gundlach’s ouster cost the firm $566 million in damages, TCW said in court documents.
Gundlach, TCW’s former chief investment officer, had offered to buy 51 percent of the business for about $350 million in September 2009, valuing the asset manager at about $700 million, according to court documents filed last year. He was dismissed by TCW about three months later.
TCW agreed to purchase Los Angeles-based Metropolitan West Asset Management on the same day it fired Gundlach, as it sought to replace the manager and his team and add mutual-fund assets. MetWest was acquired for about $300 million, according to court documents.
David Lippman, who was MetWest’s CEO before becoming head of fixed income at TCW, is president and chief executive officer of the company following the deal, and Marc Stern, who was CEO, will be TCW’s chairman when the transaction closes, according to yesterday’s statement.
TCW’s flagship fund is the $21.5 billion Metropolitan West Total Return Bond Fund (MWTIX), which has returned 8.3 percent in the past 12 months, putting it ahead of 96 percent of peers. It’s run by Tad Rivelle, chief investment officer for fixed income, Stephen Kane and Laird Landmann, who are both generalist portfolio managers in the U.S. fixed-income group.
TCW was started by Day, the grandson of Superior Oil Co. founder William Keck, as Trust Company of the West. TCW’s clients include corporate and public pension plans, financial institutions, endowments, foundations and high-net-worth investors. The firm also sells mutual funds to individual investors.
Before yesterday’s deal, TCW employees owned a 17 percent stake in the firm, with Societe Generale and Amundi, an affiliate of the French bank, holding the rest, according to a person familiar with the breakdown who asked not to be identified because the matter is private.
Asset managers have been targets of private equity before because they provide relatively steady revenue, which helps service the debt used to finance leveraged buyouts. In 2007, Madison Dearborn Partners LLC acquired Nuveen Investments Inc. for about $5.6 billion.
Carlyle, the world’s second-largest private-equity firm, will make the purchase through two of its funds and with money from TCW’s management, according to a joint statement yesterday by the two U.S. firms.
“The bigger challenge is coming back to the market within three to seven years because when private equity makes an investment, within that time they’re either going to have an IPO or sell it to someone else,” Bobroff said, referring to an initial public offering of stock.
Carlyle, based in Washington, started a team dedicated to financial services in June 2007 and, after turnover and leadership changes, hired Olivier Sarkozy in 2008 from Swiss bank UBS AG to head it. The group also includes former Wachovia Corp. treasurer James Burr.
Sarkozy and his team are seeking $2 billion for a new fund to follow the inaugural one that completed raising capital in 2010, according to a presentation viewed by Bloomberg News. The fund is seeking to take advantage of turmoil in the European financial-services industry, regulatory changes and emerging- markets opportunities.
Societe Generale “will record a limited additional adjustment in the goodwill value, depending on the final closing conditions,” Nathalie Boschat, a spokeswoman in Paris, said yesterday by telephone. She declined to give further details on the financial terms of the deal.
The transaction, expected to close during the first quarter of 2013, will increase Societe Generale’s core capital ratio under Basel III rules by 13 basis points, the company estimated in a separate statement. Societe Generale is targeting a core Tier 1 ratio under Basel III standards of between 9 percent and 9.5 percent by the end of 2013. Disposing of businesses can provide an “additional capital buffer,” the bank has said.
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