CHICAGO - As much as $36 billion might be up for grabs as Northern Trust Corp. integrates the passive and enhanced business it bought from Deutsche Bank AG on Jan. 31.
In a deal investment bankers termed unusual for its low client retention, Northern Trust Global Investments, Chicago, had secured $44 billion at the time of the sale's closing - just 42% of the $104 billion managed on Sept. 30 by Deutsche Asset Management, New York, in passive and enhanced mandates.
The week before the deal was consummated, industry observers were abuzz with speculation that it might not go throughl because client retention was so low, likely well below the deal's minimum asset threshold. Investment bankers said money management acquisitions typically specify a minimum retention of 80% of assets before the purchase price is renegotiated.
One investment banker, who requested anonymity, said he couldn't recall "any other money management acquisition where fewer than 75% of clients and assets agreed to an ownership change."
Luckily for Northern Trust, the deal was "structured properly," according to one investment banker, who declined to be named, so that it "paid only for what it actually got." The purchase price was just $100 million, well under half of the $260 million Northern Trust agreed to pay back in September. More payments might be due if NTGI persuades more of DeAM's former clients to transfer their passive assets before the final close.
The deal with DeAM was supposed to vault NTGI into the third spot among institutional managers of indexed assets, behind State Street Global Advisors, Boston, and Barclays Global Investors, San Francisco. If all had gone as planned, NTGI would have combined its $60 billion in indexed assets with the $120 billion DeAM managed as of June 30. But brutal market depreciation dropped DeAM's passive and enhanced assets to $104 billion by Sept. 30, and client defections began once the sale was announced.
To make matters worse, DeAM's largest client, Fidelity Investments, Boston, terminated DeAM in December for subadvisory services for six indexed mutual funds with approximately $24 billion under management, dropping DeAM's assets under management by 23%, to about $80 billion. Fidelity now manages those assets internally.
NTGI had signed contracts for continued investment management with 148 of DeAM's 200 clients by the time the deal closed. Between 30 and 40 clients came with the deal as "waivered" clients - those who had not yet signed a contract with NTGI - said Jamie Ziegler, senior vice president of marketing at NTGI. The remainder of DeAM's former clients have presumably terminated DeAM or NTGI.
The $68.2 billion New York State Teachers' Retirement System, Albany, terminated DeAM Jan. 30, a day before the deal closed, for management of a $600 million passive and enhanced international equity portfolio.
And, the $23 billion Alaska Permanent Fund Corp., Juneau, is using the ownership change as a reason to review management of $4 billion in passive assets.
The $5.3 billion Oklahoma Teachers' Retirement System, Oklahoma City, put DeAM on watch for management of $800 million in an S&P 500 strategy and was considering terminating the relationship, but has now lifted the imminent threat, said Bill Puckett, CIO.
Terence J. Toth, executive vice president and head of quantitative management, securities lending and transition management, said NTGI expects to end up with $68 billion to $76 billion from 170 to 180 former DeAM clients.
Leadership of the two firms' management teams also is being integrated, he said.