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'Through the storm'

Carlyle deal for TCW imminent

Compensation and staff cuts expected, but so is a distribution of equity

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Leading: David Lippman is expected to be CEO of TCW and most likely will restructure after he takes control.

Carlyle Group is poised to buy TCW Group Inc. this week, and industry veterans predict a restructuring will follow.

Sources say TCW's board of directors will meet Monday to approve the cash and stock deal. TCW spokesman Peter Viles declined comment.

TCW is likely to be valued at roughly $700 million, with Carlyle-sponsored private equity funds expected to purchase the roughly 65% stake held by French banking giant Societe General SA and the 16% stake held by SocGen affiliate Amundi.

It would be the biggest private equity deal for a U.S. money management firm since the onset of the global financial crisis.

Sources say Carlyle, based in Washington, will back a management team dominated by executives from Metropolitan West Asset Management LLC. They joined TCW at the end of 2009 when TCW announced it would acquire MetWest to replace ousted Chief Investment Officer Jeffrey E. Gundlach

Representatives for Carlyle and Societe Generale declined to comment.

With a private equity owner in control, a restructuring that could include head-count reductions and compensation cuts in exchange for equity distributions could be imminent, some sources said.

If so, MetWest CEO David Lippman, TCW's head of fixed income and a group managing director, is likely to wield the layoff ax. Under the deal, he will replace Marc I. Stern as TCW CEO, sources said.

'Through the storm'

Mr. Stern, a 22-year veteran of TCW and SocGen, assumed the CEO position in 2009 and amid the Gundlach crisis, “went forward with the intention of steering TCW through the storm to the end,” said a former TCW employee, who requested anonymity. Mr. Stern “accomplished that and is ready to turn over the reins to David Lippman,” the former employee added.

When the deal closes, Mr. Stern will become chairman and one of three TCW representatives on a new seven-member TCW board, along with Mr. Lippmann and MetWest co-founder Laird R. Landmann. Carlyle will have four seats, a majority, according to one source.

It's unclear what role, if any, Robert A. Day will play. Mr. Day founded TCW in 1971 and chairs the current 16-member board.

Admirers and critics alike say Mr. Day established a corporate culture at TCW that allowed talented investors to thrive but didn't keep a tight grip on business expenses to maximize profitability.

At the same time, a tug-of-war for investment talent after Mr. Gundlach launched DoubleLine Capital LP in early 2010 helped lift compensation for employees who opted to stay with TCW, some noted.

Investment bankers, who declined to be named, peg TCW's operating margins — the purest measure of the profitability of the firm's money management business — at roughly 20%, well below the margins reported by publicly held money managers.

For the quarter ended June 30, for example, BlackRock (BLK) Inc. (BLK) reported operating margins of 37.2%; Franklin Resources Inc., 36%; and Invesco (IVZ) Ltd., 35%.

Healthy, but ...

And while TCW has experienced healthy growth in assets under management in recent years, the $127.3 billion reported by the company as of June 30 remains below the combined $140 billion for TCW and MetWest at the time of Mr. Gundlach's firing.

A number of industry veterans say there's fat to cut at TCW and speculate that Carlyle — with one exit plan likely to be an eventual initial public offering — may push for those cuts sooner. Some predict Mr. Lippman is well-equipped to lead the effort to whip TCW into shape. The ex-TCW employee called him “a street fighter.”

Others say Tad Rivelle, TCW's CIO of high-grade fixed income, likely will have a great deal of influence behind the scenes.

Fixed income is where investment personnel most likely would be trimmed because “out of respect,” a number of TCW-managed fixed-income strategies were maintained even though they overlapped with ones managed by MetWest, the former TCW employee said. Mr. Lippman might find more to cut in accounting, distribution and information technology, the source said.

Others anticipate a less disruptive restructuring for TCW.

Compensation cuts for management and key professionals, which could boost operating margins by 10 points or more, won't be painful if employees get equity in return. That's “where real fortunes are made,” said Donald H. Putnam, San Francisco-based managing partner with investment banking boutique Grail Partners LLC.

And after all the drama at TCW over the past five years, any restructuring that leads to more stability and long-term growth is likely to be welcomed by TCW's employees and clients alike, he predicted.

Key TCW professionals that Carlyle will want to retain — including Craig Blum, Diane Jaffee, R. Brendt Stallings and Husam Nazer, equity group managing directors — have been asked to accept compensation cuts in return for equity stakes, said sources familiar with the situation.

The equity distribution is part of a plan under the new regime to roughly double the amount of TCW equity for management and key employees from the current level of around 19%, on a fully diluted basis.

This article originally appeared in the August 6, 2012 print issue as, "Carlyle deal for TCW imminent".