A group led by Madison Dearborn Partners on Wednesday agreed to pay $5.75bn in cash for Nuveen Investments in one of the richest buy-outs of a fund manager in recent years.
The proposed deal also marks a rare foray by private equity into an asset management sector which is grappling with a range of ownership structures to recruit and retain its top-performing executives.
The crucial relationships between fund managers and private and institutional clients have placed a premium on compensation, triggering a mix of buy-outs and flotations in the sector, designed to help keep staff.
The proposed purchase of Chicago-based Nuveen, which focuses on high-end retail and institutional managed accounts, is valued at 18-times trailing 12-month earnings. This is well above recent deals in the sector such as the $3.9bn purchase of Putnam by Canada’s PowerCorp earlier this year, or the acquisition by BlackRock of a Merrill Lynch funds unit which, at 15-times trailing earnings, was viewed as a high watermark in the sector.
Bankers said the deal trailed only the rich multiples during 2000, when five US fund managers were snapped up by European banks and insurers such as UniCredito and Commerzbank, many of which have been subsequently sold at a loss.
MDP will hold a majority stake in Nuveen following the expected close later this year, with management’s share of equity yet to be determined. Units of Merrill Lynch, Wachovia, Citi, Deutsche Bank and Morgan Stanley will also invest in the company and finance the acquisition.
MDP and its partners are offering $65 a share and assuming $550m in debt, a premium of 20 per cent on Nuveen’s closing price on Monday. The shares rose 16.5 per cent to $63.12 by midday in New York.
Tim Schwertfeger, Nuveen’s chairman and outgoing chief executive, described the valuation offered by MDP as “compelling”. He said the deal would allow Nuveen to accelerate its expansion and provide a compensation structure to retain and recruit personnel.
“This transaction is a growth buy-out,” said Mr Schwertfeger on a conference call with analysts. “Our opportunities still remain large,” he continued, noting plans to accelerate the expansion of its structured products business and add new distribution platforms and personnel.
Bankers said Nuveen would be better placed to enrich its compensation plan as a private company. Compensation had outpaced revenue growth in the March quarter, with assets under management growing to $166bn at March 31, despite recent outflows of retail money.
Recent private equity deals in the asset management sector have focused on hedge funds, such as TA Associates agreement in March to acquire a stake in K2 Advisors, though TA also backed a management buyout of UK-based Jupiter Asset Management from Germany’s Commerzbank.