PE firms bid to fund a management buyout of TCW

Three private equity firms are bidding in a limited auction to finance a management buyout of The TCW Group Inc., industry sources said.

And if the deal goes through, it will be executives from the Metropolitan West Asset Management side of TCW who end up running the Los Angeles-based money manager, they added.

Rumors have been circulating for five years that Paris-based Societe Generale Group wanted to unload TCW, which it acquired in 2001, for well over $1 billion.

But a deal could be imminent given that bids for a cash-only transaction are being considered from private equity managers Clayton Dubilier & Rice LLC, Warburg Pincus LLC and The Carlyle Group, said sources who spoke on condition of anonymity.

Amid a fluid environment, one private equity source familiar with the situation who declined to be named noted that CDR and Warburg Pincus no longer appear to be actively negotiating.

Spokesmen for TCW, Societe Generale, CDR, Warburg and Carlyle all declined to comment.

That MetWest executives would run TCW if the buyout occurs is ironic. MetWest, a fixed-income boutique with roughly $30 billion in assets under management, agreed to be acquired by TCW in December 2009 as a replacement for star fund manager and Chief Investment Officer Jeffrey Gundlach, who was terminated that same month.

Earlier that year, Societe Generale rejected Mr. Gundlach's $700 million bid for TCW. Now, however, it appears Society Generale is on the verge of accepting a bid for between $600 million and $800 million.

Marc I. Stern, TCW vice chairman and CEO, is leading the buyout charge, said one source who asked not to be named. Should a deal be consummated, Mr. Stern likely would cede his CEO perch to David Lippman, the former MetWest CEO now serving as TCW's head of fixed income and group managing director, the source said.

Another source said it would be more accurate to say that Messrs. Stern and Lippman were both leading the buyout effort, adding that while Mr. Lippman is the heir apparent, Mr. Stern would continue to have a significant role.

The first source said MetWest co-founders Tad Rivelle and Laird R. Landmann will undoubtedly share many executive duties with Mr. Lippman should a buyout take place. “Leadership of TCW going forward definitely will be by a party of three,” the source stressed.

Messrs. Rivelle and Landmann both are TCW Group managing directors. Mr. Rivelle also is CIO of fixed income and Mr. Landmann is a fixed-income portfolio manager.

Mr. Stern couldn't be reached for comment.

“Although Marc Stern is the CEO (in name), David Lippman is really the virtual CEO,” said a source who asked not to be named. “In many ways, MetWest engineered a reverse takeover, assuming much control over the investment management and operations of TCW,” the source added.

Another issue for both TCW executives and any potential private equity backer would be the willingness of star performers from the TCW side of the business to work under a MetWest triumvirate.

TCW employees own between 19% and 25% of TCW's equity, sources said, a hefty portion but not enough to buy the firm from SocGen without outside financing.

Pricing is always crucial in management buyouts, but would be especially so in this case, said a private equity veteran not bidding for TCW who declined to be named.

TCW's growth in recent years has been powered by a wave of inflows to fixed-income strategies that played to Metropolitan West's strengths, the private equity veteran said.

If the outlook for fixed income in general is trickier now as interest rates fall to successive record lows, the TCW management team as well as its potential private equity backers must all be wondering “Can you get the growth rates out of the business that you'd like to have,” he noted.

On the other side, executives at SocGen, which bought TCW's equity in tranches over the past decade, will be eager to avoid as much as possible the headline risk of selling the unit for far less than they paid, noted one investment banker who declined to be named.

The shaky environment for European banks amid the continent's pronounced economic woes makes it more likely a deal will get done, but “I'd be shocked if it went over $680 million,” said the banker.

Some observers see ample room for a deal to fall through in the end. “Given SocGen's balance sheet, it is hard to see how the bank will be able to accept a writedown of this size, even with a cash sale,” said a consultant with knowledge of the firm who asked not to be named.