When Carlyle Group LP reached a deal last week to acquire L.A.’s TCW Group Inc. from a French bank, all sides got what they wanted.
The Washington, D.C., private-equity firm snagged one of the country’s largest asset managers, while seller Societe Generale SA unloaded a burdensome asset.
But the real winners might have been the leaders of a firm that doesn’t even exist anymore: Metropolitan West Asset Management, a small fixed-income shop.
The West L.A. firm was acquired after the contentious and high-profile firing of TCW star fund manager Jeffrey Gundlach in 2009. The dramatic episode damaged TCW’s reputation, and forced the firm into a hasty arrangement that put MetWest executives into powerful positions at TCW.
In fact, the strength of funds led by MetWest managers – such as MetWest co-founder Tad Rivelle – has masked a significant decline in the legacy business of TCW, which saw the loss of dozens of longtime employees and tens of billions of dollars in assets after Gundlach’s ouster.
“If we look at where the assets are, they’re mostly in the MetWest product areas,” said Geoff Bobroff, a mutual fund industry consultant and president of Bobroff Consulting Inc. in East Greenwich, R.I. “That’s where their growth has been.”
The structure of the Carlyle deal reflects MetWest’s oversized role. Several longtime TCW leaders, including Chief Executive Marc Stern and founder-Chairman Robert Day Jr., will relinquish titles, while former MetWest executives will expand their influence.
Former MetWest Chief Executive David Lippman last week assumed the same title at TCW, while MetWest co-founder Laird Landmann is expected to join the board. According to sources familiar with the situation, MetWest veterans will likely hold two of the three board positions not grabbed by Carlyle, which will take four of seven seats.
“MetWest holds all the keys,” said a former TCW officer who asked not to be named. “The original TCW is a shadow of itself. The MetWest guys are pretty much the show.”
Lately, TCW has had respectable fund performance and its companywide assets are in excess of $131 billion, the highest level since before the financial crisis. Assets under management have been on the rise for nearly two years as the firm has launched mutual funds and expanded its focus on the European and Middle East markets.
But experts said many of the firm’s recent successes are attributable to its acquisition of MetWest, which has kept TCW afloat. MetWest’s heavy focus on fixed income has proved popular with investors. In fact, TCW’s flagship fund is called the MetWest Total Return Bond Fund.
TCW, on the other hand, had a number of equity funds and “the market has been very unfavorable to equity fund managers,” Bobroff said.
The problems for TCW started several years ago.
In December 2009, the firm fired Gundlach, its brash chief investment officer and one of the biggest names in the fixed-income world, over concerns that he was planning to leave and take clients with him.
The move resulted in a significant loss of talent for TCW – the majority of the roughly 60 members of Gundlach’s highly successful team left after his ouster – and led clients to pull $25 billion, about one-quarter of TCW’s total assets.
The episode also resulted in competing lawsuits and a trial that laid bare the firm’s business. During that period, some industry consultants temporarily stopped recommending TCW due to the uncertainty surrounding the firm.
“Having their dirty laundry in the media because of the court proceeding didn’t help either side, but clearly it didn’t seem to hurt Gundlach much,” Bobroff said. “He’s done quite well; TCW has not fared as well.”
Even after the Gundlach fiasco faded, TCW lost several key groups. In mid-2010, Crescent Capital Group, the alternative credit investment firm acquired by TCW in 1995, split off. Then, last year, TCW’s energy and infrastructure group separated from the firm to become EIG Global Energy Partners LLC.
The problems plaguing TCW’s legacy business stand in stark contrast to the steady growth of DoubleLine Capital LP, the downtown L.A. firm Gundlach launched in early 2010. DoubleLine now has $38 billion under management.
TCW, a longtime fixture in the local business community, was founded by Day in 1971.
Paris-based SocGen, which acquired a majority stake in TCW in 2001, had reportedly been looking to sell the firm even prior to Gundlach’s departure. That effort, which was delayed by the global recession, heated up recently due to forthcoming regulatory changes that will tighten capital requirements for major banks.
This month, SocGen, France’s second largest bank, reported a 42 percent decline in quarterly profit after taking a 200 million-euro write-down on TCW.
While TCW’s sale price was not announced, the fact that the bank was at least able to unload the firm should help quiet criticism that TCW overpaid for MetWest. The fixed-income shop was acquired for $300 million, a premium of $100 million over an investment bank’s assessment of MetWest’s value, according to facts disclosed during the civil trial between Gundlach and TCW.
Analysts said the deal was critical, even if TCW did overpay.
“I think it was absolutely the key to their survival. It filled a gaping hole that needed to be filled,” said Michael Rosen, principal and chief investment officer of Angeles Investment Advisors, a research and advisory firm in Santa Monica.
Meanwhile, the Carlyle deal was structured as a private equity-led management buyout, with the Washington firm taking a majority stake in TCW and funding the purchase with equity from two of its funds. TCW employees, meanwhile, upped their total stake from 17 percent to 40 percent.
In a statement, Stern hailed the increase in employee ownership, which he called “a transformative change that will even more closely align our interests with those of our clients.”
Still, a number of employees could be hurt by the sale. Experts believe TCW could be in for restructuring and layoffs – perhaps as many as 100 of its 550 employees, which sources described as particularly high for a firm of its size.
TCW and Carlyle declined to comment.
Already, several job changes are in the works. Stern, vice chairman of TCW, stepped down as chief executive last week, though he will assume Day’s chairman role when the deal closes.
Day, the grandson of Superior Oil Co. founder William M. Keck, has been closely associated with TCW since its founding. As the longtime chairman and chief executive – and a major stakeholder – he became one of the wealthiest people in Los Angeles, with an estimated net worth exceeding $1.3 billion before the recession. This May, the Business Journal estimated his net worth at $770 million, placing him at No. 47 on its Wealthiest Angelenos list.
Though Day will relinquish the chairmanship, sources said he plans to maintain an active advisory and mentorship role at the company. He will also remain chairman and chief executive of subsidiary Trust Co. of the West.
For reprint and licensing requests for this article, CLICK HERE.