Legg Mason Adds Alternatives With Clarion, EnTrust Deals

  • Baltimore firm buys majority in real estate firm Clarion
  • Shares fall after company reports a loss for the quarter

Legg Mason Inc., in a bid to beef up its presence in alternative investments, agreed to buy a majority interest in real estate investment firm Clarion Partners, and said it would merge its Permal hedge fund platform with EnTrust Capital.

The firm also made a deal to expand its exchange-traded fund business by taking a minority position in Precidian Investments, which is trying to win regulatory approval for a technology that could speed the growth of actively managed ETFs.

Shares of Legg Mason had dropped as much as 6.8 percent today, the biggest drop since August, after the company reported a loss for its fiscal third quarter related to an impairment charge against the Permal unit. The stock recovered to close at $31.21, down 1.8 percent for the day.

Joseph A. Sullivan, who was named chief executive officer in 2013, has been guiding the company through a turnaround after a long period of client redemptions following the financial crisis of 2008. Sullivan, who has made other acquisitions to expand Legg Mason’s lineup, had said he wanted to added more alternatives to the mix.

“With these deals, he is bolstering assets under management and giving Legg Mason new engines of growth in some of the fastest-growing parts of the industry,” Macrae Sykes, an analyst with Gabelli & Co., said in an interview.

Alternative products, including hedge funds and real estate, have grown in popularity as investors look for ways to diversify into assets that are not correlated with stocks and bonds.

Real Estate Deal

Legg Mason will take an 83 percent stake in Clarion for $585 million, with the remainder being held by Clarion’s management team, the company said in a statement Friday. The deal adds about $40 billion in real estate assets under management. Bloomberg reported earlier this month that Legg Mason was in exclusive talks to buy a majority stake in Clarion.

The Baltimore-based firm, in a separate statement, announced that Permal will be combined with EnTrust, a New York-based hedge fund investor with $12 billion under management, into a new business called EnTrustPermal in which Legg Mason will own 65 percent. The combination will create a business with more than $26 billion under management. 

Under the terms of the Precidian investment, Legg Mason bought a new class of preferred shares, which give it the rights of a holder of 19.9 percent of common equity, with the option to acquire a majority interest, the company said in a statement.

ETF Technology

Precidian’s ActiveShares mechanism, which has yet to be approved by the U.S. Securities and Exchange Commission, would allow active managers to deliver their strategies within the ETF structure without disclosing underlying holdings daily. Currently, the vast majority of ETFs track indexes.

Legg Mason made its first foray into ETFs in December, spokeswoman Mary Athridge wrote in an e-mail. The firm launched four smart beta funds, which deploy strategies that track indexes based on factors other than market capitalization.

Legg Mason, in its third-quarter earnings release Friday, said it took an impairment charge of $371 million against Permal, which it acquired in 2005. Legg Mason said the move reflected a reduction in assets under management and a shift of business to institutional investors.

The company reported a loss of $138.6 million, or $1.31 a share, compared with net income of $77 million, or 67 cents, a year earlier. Legg Mason said it experienced net redemptions of $2.4 billion in the quarter, as outflows from equity products outpaced contributions into fixed-income funds.

Permal had $17.6 billion in assets as of December 2015. Legg Mason does not break out its alternative assets as a separate category. Overall the firm managed $671.5 billion as of Dec. 31.

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