Nippon Buys Carlyle TCW Stake, Removing `Sword of Damocles'By
Asset manager’s value rises 150% since 2013 Carlyle deal
CIO says investing cycle has gone on longer than expected
After the deal closed on Wednesday, TCW’s managers control a plurality -- 44 percent -- of the firm as Nippon acquired 25 percent for about $490 million. Carlyle, which bought 60 percent of the company in February 2013, reduced its stake to 31 percent, moving the remaining holding to a long-term fund. The transaction values TCW at about 150 percent more than Carlyle’s initial investment, according to figures in an investor presentation.
Over shots of pressed ginger from the juice bar at TCW’s Los Angeles headquarters, Chief Executive Officer David Lippman and Fixed-Income Chief Investment Officer Tad Rivelle talked about the deal’s implications. The conversation was edited for clarity and brevity.
Question: How did you come together with Nippon Life?
Lippman: “About two and half years ago, they originally came to us as an investor. But you remember that old commercial where the guy said something like, ‘I liked the razor so much I bought the company’? That’s an accurate expression of what took place.”
Question: Are they going to invest a lot in TCW funds?
Lippman: “They’ve invested over $2 billion with the company. They said we could invest a lot more money. I said, ‘Thank you but no thank you. We’d rather you invest your money slowly, because we already manage a huge number of fixed-income dollars.’ The last thing I’d want you to do is put $10 billion or $20 billion into the company in a way that would worry our existing client base.”
Question: How does it affect TCW?
Lippman: “This transaction lifted the Sword of Damocles, that constant question with Carlyle: ‘This is private equity. What are you going to do next?”’
Rivelle: “We’ve gone to capital that’s more permanent from capital that’s more of a short-term horizon. They say that private equity dates you, they never really marry you, although in the case of this new Carlyle fund maybe that’s an exception.”
Question: You advocate active management but your Metropolitan West Total Return Bond Fund has returns very similar to the Bloomberg Barclays Aggregate over the last two or three years. Why should investors put their money with you?
Rivelle: “We’re taking about 70 percent of the risk but achieving Agg-like results. Everyone will draw the line differently. You get to the last part of the cycle and you say, ‘The party’s gone on long enough. It’s time to close the tab, get the Uber and go home. Sure, I might miss out on a couple of hours of fun, but I know the cops are going to come and break things up.’ We drew the line a couple of years ago and it was already 2 in the morning. As it turns out, it’s now 5 in the morning and the party is still going. This is being used as justification that maybe it’ll never end. If your preference and belief is that, you should be partying on -- that’s not what we’re going to do.”
Question: Where do you see opportunities for growth?
Lippman: “We’ll look at acquisitions where they make sense, but the question for us is always build versus buy. We’re looking to expand in the alternative products area, because we look at the markets and we’re at the end of literally 10 years of basically Fed easing. Interest rates are historically low. Spreads in credit-related products are tight. The opportunities aren’t there now, but if you don’t develop the opportunity beforehand, you won’t be prepared when the opportunity arises.”
Rivelle: “Traditionally what happens is the zeitgeist changes, from it’ll all be fine to the world’s coming to an end. And neither one is really true, but the money is made by avoiding the risk when everybody says it’s fine and by taking the risk when everybody says capitalism is finished.”