Julius Baer Investment Management LLC, New York, could end up for sale if UBS AG sells its 20.7% stake back to parent Julius Baer Holding AG.
Officials of Zurich-based Julius Baer Holding might consider selling the U.S. asset management arm to finance the purchase of UBS’ shareholding, according to banking analysts and asset managers who asked not to be named.
UBS announced May 25 that it is selling its 20.7% stake, worth about 4.2 billion Swiss francs ($3.4 billion); on Friday, Baer stock closed at 91.15 francs per share. The shareholding was valued around 2 billion francs when UBS acquired it in December 2005 and agreed to a lock-up period that ended Friday.
“We’ll sell the stake,” said Serge Steiner, deputy head of UBS media relations. “The options are wide open. We would consider disposing of the whole stake to one buyer, or in a capital market offering.”
For the Julius Baer group, one of the main concerns is that another buyer could use the 20.7% stake as a stepping stone to a takeover of the bank itself, analysts said. So it is essential that the group buys back a significant portion, at least, of UBS’ stake.
However, Julius Baer is unlikely to be able to purchase the entire block without selling a portion of its own assets.
New York-based Julius Baer Investment Management is a potential sale candidate because it operates independently and is therefore easier to separate from the group. A large portion of the profits generated in the U.S. are returned to compensate the local management team, so the division’s sale would not affect group profits as much as sales of other units of the bank would. However, the U.S.-based manager is growing faster than either Julius Baer’s European asset management division or GAM Ltd., the bank’s hedge fund manager.
“Everybody would be interested — anyone without an international product or anyone with an international strategy that isn’t any good,” said one consultant based in the U.S. who requested anonymity. “I am sure that management might be interested in buying itself. That’s one of the big trends going on in the U.S. right now.”
Management buyout?
“It is likely that management (of Julius Baer Investment Management) would want to buy itself back,” said Chas Burkhart, founder and chairman of Rosemont Investment Partners LLC, West Conshohocken, Pa. Rosemont is a private equity firm focused on investing in asset managers.
“In part, it’s really the management that controls the investment capability, and therefore, the clients,” Mr. Burkhart said. “This is probably a prime situation for an MBO.”
With $53 billion in assets under management, primarily in international equities, Julius Baer Investment Management contributed 30% of the total 223 billion francs under management for the group’s asset management division as of Dec. 31, 2006. The division comprises GAM and Julius Baer Asset Management, which combines the U.S. and European asset management units.
In 2005, UBS sold GAM and three Swiss private banks — Ehinger & Armand von Ernst AG, Ferrier Lullin & Cie SA and Banco di Lugano SA — to Julius Baer for 3.8 billion Swiss francs in cash and the 20.7% stake in the Julius Baer group. UBS was required to hold the shares for 18 months. As May 25 drew closer, the possibility that UBS might soon sell its stake pushed Julius Baer prices up as high as 97.95 Swiss francs per share on May 18, a gain of 9% in a day.
“This is a non-strategic stake,” Mr. Steiner said of the Baer holding.
Proceeds from the sale will be used to buy back UBS shares in the coming months, said Mr. Steiner, who declined further comment.
Julius Baer spokesman Martin Somogyi declined to comment for the story.
Analysts and consultants said JBIM is a fast-growing U.S.-based manager in the institutional and mutual fund markets because of a strong track record in international equities at a time when U.S. investors are diversifying away from domestic equities.
Track record
Assets in JBIM’s Julius Baer International Equity and Julius Baer International Equity II were $42 billion and $12 billion, respectively, as of March 31, according to data from eVestment Alliance, Marietta, Ga. The first international equity fund, which is closed to new investors, recorded an annualized three-year return of 23.75% and an annualized 10-year return of 18.2% as of March 31. In comparison, the strategy’s benchmark — the Morgan Stanley Capital International Europe Australasia Far East index — chalked up an annualized three-year return of 19.8% and a 10-year return of 8.31%.
“(Julius Baer’s) record has attracted a lot of attention at the same time that international investing has attracted a lot of attention,” said Gregg Wolper, senior fund analyst at Morningstar Inc., Chicago.
At the same time, three other major international equity managers — Bank of Ireland Asset Management, Capital Guardian Trust Co. and Putnam Investments — had troubles maintaining good performance, consultants said.
“Julius Baer has been plugging along for a number of years, kicking out good performance,” according to one consultant who asked not to be named. “When core managers started to fall apart and gave investors a lot of reasons to leave, Julius Baer was there at the right time.”
Analysts also think that Julius Baer is likely to purchase a sizable chunk of UBS’s holdings in Baer, with the rest to be divided among other institutional investors, possibly including pension funds. However Baer officials would have to convince UBS to divest its stake in parts. “If they sell in small pieces to different participants, they might have to sell at a discount,” said Andreas Venditti, bank analyst at Zuercher Kantonalbank, Zurich.
“Despite the possibly lower price that UBS would get, I think that UBS would rather forgo a little on the price in the short term in order to get it right strategically in the long run,” Mr. Venditti added. “UBS would not want to strengthen any potential competitor.”
Another option would be selling or floating what many analysts dubbed “the jewel in the crown” — GAM, a London-based hedge fund manager with 83.2 billion Swiss francs in assets under management, instead of its U.S. asset management arm.
Analysts think that’s less likely, however, because GAM plays a key role in the bank’s push to further cross-sell its asset management strategies to private banking clients.
Third-party institutional assets comprise about 20% of GAM’s assets. GAM has an extensive portfolio of single-manager hedge funds, hedge funds of funds and active long-only funds.
GAM separate
GAM is run separately from Julius Baer Asset Management. David Solo, chief executive officer of asset management, oversees both GAM and Julius Baer Asset Management.
“The current management (of the asset management group) is very strong. They have everything in place to do well in the next 12 to 18 months,” said Daniele Scilingo, Zurich-based head of Swiss equities at Pictet Asset Management, which holds shares in both UBS and Julius Baer. “David Solo is very clever. He knows exactly what Anglo-Saxon investors like.”
If UBS doesn’t sell its stake in Julius Baer back to the group, analysts cited two other possible scenarios.
One option is that UBS could sell the entire stake to another financial institution seeking to eventually acquire all of Julius Baer Group. Analysts who asked not to be named said Deutsche Bank AG, Frankfurt, is a potential suitor.
But a Deutsche Bank purchase might mean the departures of Mr. Solo and Hans de Gier, president of the group executive board and group CEO, both of whom were appointed from GAM as part of the 2005 transaction and are key to Julius Baer’s success. Analysts said Deutsche officials would want to put their own people into top management positions.
But the same analysts also expressed doubt that UBS would want to give Deutsche Bank that kind of an edge. “UBS isn’t interested in giving one of its gems to one of its biggest competitors,” one source said. Deutsche Bank spokesman Ronald Weichert declined to comment.
