CHICAGO — The private equity mega-buyout frenzy has finally hit the money management industry.
Scores of multibillion-dollar buyouts have taken place recently across a number of other industries. But now, Nuveen Investments Inc.’s decision to sell its business for $6.3 billion to a private equity consortium led by Madison Dearborn Partners LLC will register as the largest buyout deal in the history of the asset management industry.
The Nuveen deal dwarfs the previous high-water mark for a buyout of a money manager, the $1.465 billion management-led buyout of Jupiter Investment Management Group, backed by private equity firm TA Associates Inc. three months ago.
The private equity acquisition of Nuveen, which has $166 billion in assets under management, also ranks as the third-largest overall deal in the industry’s history, behind last year’s BlackRock/Merrill Lynch Investment Managers and Bank of New York Co. Inc./Mellon Financial Corp. blockbuster transactions.
And, it is only the second time in the industry’s history that a publicly traded money manager has de-listed, said Darlene DeRemer, partner at Grail Partners LLC, Boston, an advisory merchant bank. The last manager public manager to go private was Wellington Management Co., Boston, in 1979, according to data from Grail.
With private equity firms raising large pools of capital in recent years, industry observers have said it was just a matter of time before a private equity-driven deal of Nuveen’s size took place in the money management industry.
Ben Phillips, managing director in the New York office of investment bank Putnam Lovell NBF, said the Nuveen deal is a major statement by Madison Dearborn and an endorsement for the long-term prospects of the asset management industry. The price tag, while lofty, speaks to the level of interest private equity firms have now taken in the asset management industry, he added. “It’s a high price, but it’s not outlandish.”
Nuveen shareholders will receive $65 per share, a 20% premium from the value the company’s stock on June 19, the day before the deal was announced. The $6.3 billion price tag for Nuveen also includes $550 million in existing debt.
Majority stake
Madison Dearborn will own the majority stake in Nuveen when the deal closes — expected by year’s end — while a group of five other backers and Nuveen management will own the remainder. Both firms are based in Chicago.
It’s Madison Dearborn’s first private equity deal with an asset management company, and it’s also the first significant buyout of an asset manager by a private equity firm other than TA Associates, Boston, or Hellman & Friedman LLC, San Francisco.
Madison Dearborn Managing Director Timothy Hurd, who led the Nuveen deal, said the firm has been vying for a buyout of an asset manager for the last five years.
“We’ve been to the finish line with several firms during that time, one similar in size to this deal, but we’re very pleased to have done this one,” said Mr. Hurd. He declined to discuss any previous deals the firm had pursued.
Mr. Hurd said he has been attracted to asset management companies because of their high profit margins and potential for long-term returns. “There are not a lot of other industries in the world where if you are just average, you can still grow your business by 2%-3% each year,” he said. “And Nuveen isn’t average, so that’s what makes them so attractive.”
Nuveen consists of several asset management affiliates it has acquired over the years, including Nuveen Asset Management, which manages $79.4 billion in municipal bonds; NWQ Investment Management, which runs $36.2 billion in value equities; and Tradewinds Global Investors, which manages $33.5 billion in global equities.
The company has gradually transformed itself from just a $33 billion municipal bond shop 11 years ago into a more diversified “multi-boutique” asset manager with a balance of retail and institutional clients, John Amboian, Nuveen president, said in an interview.
This business model, he said, as well as the firm’s current mix of investment strategies and clientele, caused Nuveen to be “tailor-made for private equity.”
Nuveen has gradually increased its profitability in over the last five years, going from $126 million in net income in 2002 to a $188 million in net income last year, a 49% increase.
Timothy Schwertfeger, Nuveen chairman and CEO, said that having private equity backers will allow executives to stay focused on continuing to develop Nuveen’s business, but will also “accelerate our ability to invest” in future growth, in the form of more acquisitions or hiring and retaining key investment professionals.
Other publicly traded asset managers could similarly be seduced by private equity, said Putnam Lovell’s Mr. Phillips, adding that companies such as Pittsburgh-based Federated Investors Inc. and Atlanta-based INVESCO PLC would be logical private equity targets.
Few large targets
But private equity firms have only a limited number of large targets, said Charles Burkhart Jr., founder of private equity firm Rosemont Investment Partners LLC, West Conshohocken, Pa.
At the end of 2006, there were roughly 50 money management firms with more than $100 billion in assets each under management, according to Pensions & Investments’ annual survey of money managers.
And if a competitive private equity environment drives prices even higher for these targets, it will make it more challenging for private equity firms to get high returns on their investments, said Mr. Burkhart.
“I expect to see more deals, based on the amount of interest and private equity money out there right now,” he added. “But what will the private equity investors have to do to get the 20% returns on investments that they have grown accustomed to?”
