Winds of change swirl around TCW
Asset growth will be necessary to service buyout debt burden
By Randy Diamond | January 21, 2013
Changes are occurring at a fast pace at Los Angeles money manager TCW Group Inc.
In the last six weeks alone, the firm acquired one alternatives investment manager, formed a partnership with a second and announced the hiring of new senior officials. At the same time, some other top employees and an investment team have left.
The biggest change should be coming in a matter of days: completion of Societe Generale SA's $780 million sale of TCW to The Carlyle Group and TCW employees.
The leveraged buyout, announced in August and scheduled to close on Jan. 31, is based on the premise that TCW will be able to handle doubling its debt load by bringing in more investment fees as it builds assets under management.
A December report from Standard & Poor's Corp., New York, said TCW expects to take on $355 million in new debt after it pays off $152 million in existing obligations.
So TCW's new management will have to attract more assets under management to pay off the new debt it is taking on.
TCW has more than $138 billion in AUM, and has grown assets by more than 17% during the past year. But the firm also has a history of losing top investment talent.
In 2010, two of its most profitable units — private debt alternatives firm Crescent Capital Group LP and energy investment firm EIG Global Energy Partners LLC — became independent entities. In December 2009, TCW terminated star money manager Jeffrey Gundlach, and investors pulled more than $30 billion from the firm.
But a source familiar with the Carlyle-TCW deal said Carlyle executives were aware of the problems TCW had in retaining talent and felt the company never lived up to its potential. With the right people in charge plus Carlyle's own investment expertise and a larger employee equity stake in the company, Carlyle executives believe TCW could grow much larger.
“Money managers have big egos, and the key to success is to manage those personalities,” said Blair Thomas, CEO of EIG, Washington, which was involved in its own legal battle with TCW until last week over the Carlyle acquisition. “The inability of senior TCW officials to do this was a management failure.”
Mr. Thomas said his and other investment teams that left might still be at TCW if management had not created an antagonistic work environment.
Marc Stern, former TCW CEO and longtime top official, declined to comment.
The responsibility of growing TCW while changing its culture now falls on David Lippman, who has been TCW's president and CEO for five months. Mr. Lippman is the former CEO of Metropolitan West Asset Management LLC, a money manager acquired by TCW in December 2009 to replace Mr. Gundlach. Mr. Lippmann said he plans to meld various investment groups that haven't always cooperated in the past to unify the firm and build its business.
“My vision and what we are in the process of doing now is to demolish the silos that existed,” he said in a recent interview. “There were independent businesses all housed under TCW's roof or name, and what started a few years ago is a process designed so that the people at TCW work shoulder to shoulder in pursuit of the same goal.”
Mr. Lippman should be helped by a new structure that increases employee ownership of the firm to 40% from the current 17%. Two Carlyle funds will own the remaining 60% of TCW.
“Nothing aligns people's interests to work together better than having economic ownership of each other's businesses,” Mr. Lippman said. “This is a really important mantra: we all want to drink from the same fountain.”
The issue of employee ownership had been a bitter topic among TCW employees angry at Societe Generale for not giving them stock; the French bank relented somewhat and granted stock to 160 employees in February 2010. Sources said Mr. Stern was responsible for the stock distribution and had pushed Societe Generale on the subject for several years.
“We see the strong potential of TCW being unlocked by incenting investment managers to stay as long-term owners,“ said Olivier Sarkozy, a Carlyle managing director in New York and head of its global financial services group.
Mr. Sarkozy said Carlyle was interested in TCW because it sees a potential for growth that would allow it to compete better with larger players like BlackRock (BLK) Inc. (BLK) and Pacific Investment Management Co. LLC. “We are determined to grow the business,” he said.
But the new ownership structure is not benefiting everyone. Of the 150 TCW employees who now have stock in the company, only 50 are getting an additional equity stake, sources say. Top TCW management designated key portfolio managers and other managers as critical to TCW's continuing success and will concentrate the additional equity in their hands, sources say.
Disagreements over compensation led one equity team to leave last month and establish a new equity unit at Mr. Gundlach's DoubleLine Capital LP, Los Angeles. The group, led by Brendt Stallings and Husam Nazer, managed small-cap and midcap equities.
Komal Sri-Kumar, chief global strategist, left Dec. 31 to start his own macroeconomic consulting firm. He continues part time as a TCW equity portfolio manager.
Mr. Lippman won't discuss staff departures, but says more employees have been hired then have left in the last few weeks. Those new hires include Jess Ravich, group managing director and head of alternative products; Meredith S. Jackson, general counsel; and seven portfolio managers from Regiment Capital Advisors LP's special situations funds group.
TCW also announced in December that it partnered with hedge fund manager Scoggin LLC, New York, to create new distressed and event-driven hedge funds.
But the new alternatives efforts are small when compared to the $17.5 billion in assets Crescent Capital and EIG had raised when they were part of TCW.
TCW will no longer be entitled to lucrative incentive and management fees for future funds raised by EIG as part of agreement reached between the two firms last week stemming from the Carlyle acquisition. TCW's contract had required EIG to split fees until 2020.
One of TCW's biggest strengths has been in fixed income, which comprises more than 80% of the firm's AUM. Fixed-income assets fell to $57 billion at the end of 2009 following Mr. Gundlach's departure.
TCW had $87 billion in fixed income at the end of 2012.
Institutional strategies have been doing well. TCW says 92% of its institutional AUM was in strategies that outperformed their benchmarks over the year ended Dec. 31. For the three-year period, 89% of its institutional assets were in strategies that outperformed. For the five years, the figure was 81%. The firm had $97 billion total in institutional assets as of Dec. 31.
TCW's mutual fund business also has been strong. The company reported $10.2 billion in net inflows in 2012 and another $1 billion in the first 16 days of 2013. As of Jan. 16, TCW had more than $50 billion in mutual fund assets, the highest in its history and more than double the amount it had when MetWest came on board in February 2010.
The fallout from the acrimonious departure of Mr. Gundlach is no longer an issue for TCW, says consultant Michael Rosen, principal and chief investment officer of Angeles Investment Advisors LLC, Santa Monica, Calif. Mr. Rosen said the MetWest investment team, which had a solid long-term record before joining TCW, has continued its outstanding performance.
This article originally appeared in the January 21, 2013 print issue as, "Winds of change swirl around TCW".