LONDON/BOSTON U.S. asset manager Legg Mason Inc (LM.N) said on Thursday it will buy Fauchier Partners, one of London's oldest fund-of-hedge-funds firms, from BNP Paribas Investment Partners (BNPP.PA), the latest deal in the fast-consolidating sector.
London-based Fauchier, which manages $6 billion in assets and has been tipped as a possible sale target since 2011, will be merged with Legg Mason's fund-of-funds firm Permal, creating a unit with $24 billion in assets under management.
Typically, a fund-of-funds firm holds a portfolio of other investment funds, sometimes in addition to its own direct investments in securities.
Legg Mason also said it has revised employment deals and other arrangements with Permal, which could become a model for additional changes aimed at resolving tensions among its affiliated investment units. Legg Mason is seeking a new chief executive and faces continued outflows from its well-known equity funds.
In addition, Legg Mason said it will take after-tax charges of $460 million to $550 million for asset impairment. The reasons for the charges include stock price uncertainty as the company searches for a new CEO, and continuing outflows, Legg Mason said in a regulatory filing.
Shares in Baltimore-based asset manager were up 14 cents at $25.59 in morning trading.
The Fauchier deal comes as firms in the $636 billion fund-of-funds sector try to beef up assets or pick up rivals on the cheap as the industry struggles to recover from the credit crisis. Many firms have reported withdrawals of investor cash and dwindling margins since the credit crisis; some were also hurt by investing with U.S. fraudster Bernard Madoff.
Deals this year have included Franklin Resources' (BEN.N) buying a majority stake in K2 Advisors, private equity group Kohlberg Kravis Robert's (KKR.N) buyout of Prisma Capital Partners, and Man Group's (EMG.L) purchase of FRM.
The combined business of Permal and Fauchier will have about 60 investment professionals in New York, London, Paris and Singapore, led by Permal's Robert Kaplan and Fauchier CEO Clark Fenton.
Permal President Omar Kodmani said the deal will help his firm maintain the critical mass needed in the industry. "You really can't compete if you're sub-scale," he said in a telephone interview in London.
Kodmani said the two businesses are complementary. "They (Fauchier) are stronger in equity long-short and event-driven, while we are stronger in global macro and fixed income credit. In the client base, we have a large U.S. institutional client base while they have (a strong) UK business," he said.
Legg Mason said the deal would close in the first quarter of 2013 and add to earnings in the first year. It did not disclose the terms of the deal.
Prices are hard to estimate, but Man Group's recent purchase of FRM was seen by many industry executives as a deal done on the cheap. Man made no upfront payment, instead paying a maximum of $82.8 million cash for FRM's $8 billion in assets, depending on asset retention, plus additional payments depending on performance fees earned.
In late 2010, Fauchier Partners, which was founded in 1994, froze two funds after volatile post-crisis markets triggered a wave of investor withdrawals. In 2011 BNP decided to regroup its alternative-asset brands, leaving out Fauchier, a move that fueled speculation a sale was in the works.
NEW INTERNAL DEALS?
Legg Mason has been roiled by customer outflows and mixed investment performance in recent years.
In addition to Permal, other Legg Mason affiliates include its big Western Asset Management bond unit, its ClearBridge Advisors equity unit, and its Brandywine Global equity and bonds shop.
A source of tension within Legg Mason has been the revenue-sharing arrangements among the units and the parent organization. A Legg Mason spokeswoman, Mary Athridge, said in a telephone interview that while the revised arrangements are "specific to Permal, we will look at ways to incentivize key affiliates."
A board member of Legg Mason is the activist investor Nelson Peltz, known for breaking up companies in other sectors in which he invests. Through his investment firm, Peltz holds about 10 percent of Legg Mason shares. Previous limits on Peltz's ownership of Legg Mason shares have expired but he has declined to discuss his intentions.
According to Legg Mason, BNP and Fauchier were advised on the deal by investment banker Freeman & Co and the law firm of Allen & Overy. Legg Mason and Permal received legal advice from Dechert LLP and handled financial aspects of the deal internally.
(Additional reporting by Lionel Laurent in Paris, Jessica Toonkel in New York and Sagarika Jaisinghani in Bangalore.; Editing by Supriya Kurane, David Cowell and John Wallace)