NEW YORK -- Yamaichi International Capital Management is likely to be acquired soon, following the collapse of parent Yamaichi Securities.
The sale would be an about-face for the Tokyo-based firm, which has $24 billion under management worldwide.
Just two weeks ago, YICM was moving forward with plans for a management buy-out, said an official with Yamaichi Capital Management, New York, the U.S. arm of YICM. Yamaichi Capital manages just over $1 billion for U.S. institutional investors.
Although questions about the future of Yamaichi International Capital soon should disappear, the recent upheavals have prompted at least one pension fund to terminate the firm and others to re-evaluate it.
After news broke of the failure of Yamaichi Securities, Nissan Motor Corporation USA, Gardena, Calif., removed Yamaichi Capital as a non-U.S. equities manager for its $180 million defined benefit plan.
"We felt it was our fiduciary responsibility to (eliminate) the uncertainty arising from the Yamaichi failure," said Controller John French. Yamaichi had been managing an $8.7 million portfolio for Nissan.
For some, business as usual
SEI Investments, Oaks, Pa., a manager of managers, offers a more sanguine view. It uses Yamaichi Capital to handle investments in Asian emerging markets for its emerging markets and international equity portfolios.
"As of now, our position about Yamaichi hasn't changed," said Charles Friedberg, senior investment analyst with SEI Investments. "We still have them run money as usual, although we talk to them every day" about the situation.
Mr. Friedberg said Yamaichi has good performance, a "disciplined, risk-overlay investment approach and consciousness of benchmarks." He could see the relationship continuing even after Yamaichi changes hands.
"If SEI concludes (the new Yamaichi arrangement) is just an ownership scheme and not a new firm imposing its investment process and philosophy on existing (Yamaichi) management, I cannot foresee SEI changing its view on the original YICM group," Mr. Friedberg said.
On Dec. 5, the Montana Board of Investments, Helena, ($7 billion in total assets, $4 billion in pension money) was expected to consider the Yamaichi situation at a board meeting. Yamaichi Capital manages a $35 million Pacific Rim equities portfolio.
"We told (Yamaichi officials) that we have a board meeting. And we want to have a firm answer from them by then" on their "strategy going forward," said Bob Bugni, assistant investment officer.
On one hand, the fund doesn't want to "get rid of Yamaichi" and have to find another manager "from scratch," he said. But a key consideration will be any possible changes in Yamaichi's portfolio managers. "We'll have to look at the buyers, and whether they will keep the key personnel that Yamaichi has now."
Other Japanese firms tainted?
Some consultants believe the Yamaichi morass could taint the appeal of other managers linked to Japanese brokerage firms.
Noted Christopher Fagan, senior investments consultant with Watson Wyatt Worldwide in London: "There has always been a lack of understanding of the ownership structure" of the money management arms of Japanese brokerage firms.
The recent collapse of Yamaichi Securities should lead to more questions on this issue. Due diligence on ownership issues will increase, he predicts. That's because clients will want a sense of whether Yamaichi's fate is likely to be replicated in Japan.
The collapse of Yamaichi Securities won't "make life any easier" for the money management arms of Japanese brokers, said Barry Gillman, president of consultant Farris, Gillman & Associates Inc., Fort Lee, N.J.
He cited two major obstacles these firms now face: the currently declining appeal of Asian investing now that markets have tumbled; and the perception that financial troubles in Japan are not an isolated problem.
Money management failures in Europe and the United States often are linked to problems within the firm. But in this case, Mr. Gillman said, it would appear as if "the whole securities industry is shuffling toward a cliff. And Yamaichi is just the first one to get there."
As a result, the entire industry in Japan appears to be on at least an informal watch list, he said.
What a buyer would get
What would a buyer get if it bought Yamaichi International Capital Management? The 26-year-old firm is said to be profitable, although no supporting information was provided by the firm.
According to Nelson's 1997 Directory of Investment Management, 21% of Yamaichi International Capital's assets are in equities, almost 57% are in fixed income and 22% are in other asset classes. About 72% of the firm's assets under management came from Japan, the directory states.
One source, who asked not to be named, said he'd learned that a sizable amount of YICM's assets under management are tied to "Yamaichi group relationships." As a result, such assets conceivably could "peel off as Yamaichi's relationships fall away" amid the firm's breakup.
That could make YICM less attractive to more conventional fund management groups.
Nonetheless, YICM appears to be one of the better opportunities within the Yamaichi group.
Three of Yamaichi's units, including YICM, survived the closure of Yamaichi Securities, said George Dole, marketing director of Yamaichi Capital Management.
Two weeks ago, Mr. Dole said Japan's Ministry of Finance had formally severed the relationship between Yamaichi International Capital Management and Yamaichi Securities.
"In effect, MOF is holding in trust the shares of Yamaichi International Capital Management that were previously held by other Yamaichi entities," he said.
Management buy-out floated
Mr. Dole talked then about a management buy-out of the firm. But by last week, a spokesman for Yamaichi Capital said the focus had changed to a likely sale of YICM -- or a joint venture arrangement.
Early last week, the Yamaichi Capital spokesman said the firm had received 14 inquiries from financial institutions seeking to acquire the manager, and six firm offers from major U.S., European and Japanese institutions.
One requirement for the buyer is that it must retain YICM's executive staff and portfolio managers, the spokesman said.
DLJ Phoenix Securities Ltd. in London is the investment banker handling the sales -- in whole or part -- of Yamaichi group entities.
An investment banker with DLJ Phoenix, who asked not to be named, said he hoped the sale of Yamaichi International Capital could be concluded by year's end. He said Yamaichi's entities offered a "unique opportunity" for a buyer to gain a major presence in Japan's domestic brokerage and asset management businesses.
Big name, low fee revenue
Steven Pierson, associate with Putnam Lovell & Thornton Inc. in New York, said the firm would provide a "big name as well as contacts in Japan," thus a buyer would get instant access to clients that could otherwise take time to obtain. But fee revenues wouldn't be that high. He said Yamaichi's pre-tax margins will be much lower than the 30% to 40% typical of U.S. institutional money managers. He cited the firm's "expense structure," including overhead, and the fact that fixed income -- which accounts for more than 50% of its assets under management -- generates lower fees than asset classes such as stocks.
"I would conclude about the selling price that, if you're looking purely at levels of profitability, the multiples paid for this are going to be off the charts," said Mr. Pierson. He believes the purchase price will be somewhere between $100 million and $250 million.
Still, he said, a buyer may embrace Yamaichi not for its earnings but because of its networks of contacts and distribution.
