For $500 million, AIG Investments could turn out to be a sweet — and low-risk — deal for a consortium led by Franklin Templeton Investments, San Mateo, Calif., and Crestview Partners LP, a New York private equity firm.
The duo has emerged as the favored bidder for the New York-based investment arm of troubled American International Group Inc., and a final deal is likely to be hammered out within a month or two, according to a source close to the talks, who declined to be named.
Industry veterans say Franklin Templeton might view at AIG Investments — with its experience running private equity and hedge fund-of-funds vehicles — as a means of gaining greater exposure to alternatives investments. It's also possible the firm is teaming up with Crestview to make a medium-term private equity investment of its own.
Regardless, with a $500 million price tag being tossed around for a firm with about $85 billion in assets under management, a deal could represent a low-risk bargain for Franklin Templeton.
The price — which some sources said could even be less than $400 million — could reflect the parent company's dire circumstances. AIG officials have been trying since last fall to unload the company's investment arm as part of broader efforts to eventually pay down the $182.5 billion the parent received in bailout money from the U.S. government.
AIG Investments spokesman Joe Norton confirmed that talks are taking place with the consortium, but declined to provide any details. Franklin spokeswoman Lisa Gallegos declined to comment. Crestview spokesman Jeffrey Taufield also declined to comment.
Still unclear is how any potential deal would be structured. One source who spoke on condition of anonymity said that Franklin, Crestview and perhaps two or more additional investors would each get minority stakes in AIG Investments. AIG Investments would remain a stand-alone entity, and its current management team would remain in place.
For Franklin, the deal would allow it to market AIG Investments' strategies. Both companies would also be able to leverage each other's infrastructure around the world.
Another source, who also asked not to be named, said Franklin might end up with a minority investment of 20% or less in AIG Investments, with Crestview putting in most of the money for a far bigger stake.
The source also said Charles Johnson, former co-president of Franklin, is leading the talks for the consortium. Mr. Johnson, who stepped down from Franklin in 2002, is the grandson of the company's founder and is now managing director of Tano Capital LLC, San Mateo, which invests heavily in alternatives, and is advising the consortium.
Franklin has stayed out of alternatives for the most part, unlike AIG Investments, which has a third of its client assets invested in strategies such as private equity (both direct and funds of funds) and hedge funds (mostly in funds-of-funds strategies).
AIG Investments has another third of its AUM invested in long-only equities and the final third in long-only fixed income. A sizable chunk of its assets are managed for AIG-related entities, including the firm's general account.
As of March 31, about $63.5 billion was run for non-affiliated external clients, according to AIG's first-quarter earnings report.
Franklin's assets under management totaled $421 billion as of April 30, according to the company's website.
D.J. Neiman, analyst for William Blair & Co. LLC, a Chicago-based financial services firm, said AIG Investments would make an attractive addition for Franklin with relatively little risk.
“It makes sense to partner with another firm and take a lower risk approach to this,” he said.
Mr. Neiman said Franklin, if it chose to do so, would be able to add new investment capabilities through AIG while augmenting its existing capabilities.
“The incremental margins and incremental opportunities are pretty attractive,” he said. “I think there's plenty of upside.”
One source, who would only speak on background, said AIG's alternative strategies, in particular, would be a good fit for Franklin. “It gives them resources and heft moving into that area,” the source said.
Franklin would not have to worry about integration issues and culture clash because AIG Investments would likely be run independently from the rest of the business.
“I think it's more of just adding or providing the platform from an operational and distribution perspective,” Mr. Neiman said.
Nonetheless, there are still risks. For instance, Mr. Neiman said it's unclear how much of AIG Investments' $85 billion in assets would remain if and when an acquisition goes through, although the bulk of clients looking to leave probably have done so already.
What's more, if AIG Investments is like other captive managers, its parent company is probably paying less than market rates for the assets the firm runs on its behalf, “so you don't know what the revenue yield is on these assets,” Mr. Neiman said.