Private equity firms expected at head of the line of Russell bidders

Northwestern Mutual Life Insurance Co. has put Russell Investments, its investment management and consulting business, up for sale.

Private equity firms are expected to be the most aggressive bidders. Sources say KKR & Co., Apollo Global Management LLC, Hellman & Friedman LLC, Carlyle Group and Genstar Capital are expected to at least take a look at the deal. (Hal Strong, a former Russell Investments vice chairman, is an operating executive at middle-market firm Genstar.)

After three years of rumors, the sales process is finally underway. The Goldman Sachs Group Inc. is lead investment banker; Goldman also worked for Northwestern Mutual on the deal to acquire Russell in 1999. Michael DuVally, Goldman Sachs spokesman, declined to comment.

Goldman is poised to distribute the sales memorandum to prospective buyers, sources said. Selection of a buyer is expected by mid-July. Sources put the likely price for Russell at $1.7 billion to $2 billion.

Rumors that Russell Investments would be put on the block first surfaced in 2010, but it took this long for Milwaukee-based Northwestern Mutual to prepare for the sale and start the process, said the sources, who requested anonymity.

Seattle-based Russell was plagued with multiple problems, including the wind-down of two of its three hedge funds of funds in 2008; the closure in 2012 of a portion of its exchange-traded fund business — its passively managed U.S. family of ETFs — after it gathered only $310 million in assets; and the inclusion in its money market funds of $403 million in Lehman Brothers' short-term notes, which became worthless when Lehman declared bankruptcy. (According to a 2008 Securities and Exchange Commission filing, Northwestern Mutual agreed to contribute capital to the fund to prevent its per-share net asset value from falling below $1, which resulted in a no-action decision by the SEC.)

Katherine Stouffer, Russell Investments spokeswoman, declined to comment on the possible sale.

In an e-mail, she said the firm's hedge fund business came under pressure during the financial crisis. “The decision we made to wind down certain funds was in the best interest of our clients, and we were able to return (about) 70% to 90% (depending on the fund) in the form of cash back to investors despite a very challenging market environment,” Ms. Stouffer said.

Northwestern Mutual executives also had to contend with Russell's legacy consulting business, which didn't contribute much to the company's profitability, said sources close to the firm.

At year-end 2007, Northwestern Mutual reported to the Wisconsin Department of Insurance that Russell Investments had $2.2 billion in assets, $1.8 billion in liabilities and $389 million in shareholder's equity. Russell operations in 2007 produced a net income of $86 million. (More recent information was not available from the department.)

Russell Investments' assets under management increased $52 billion in two years, to $257 billion as of Dec. 31, Ms. Stouffer wrote. Russell's overall operating profit tripled between 2011 and 2013, she stated. Ms. Stouffer declined to provide additional financial information, including Russell's net income or profit margins, stating it is proprietary information of the non-public company.

Russell Investments also has been whipping through executives. In 2008, Craig Ueland resigned as president and CEO after only five years at the helm. He was replaced by John Schlifske, a Northwestern Mutual executive vice president, as the company searched for a permanent CEO. The following year, Andrew Doman was appointed Russell's new president and CEO, and Mr. Schlifske returned to his duties at Northwestern Mutual. Mr. Doman resigned two years later and was replaced by current CEO Len Brennan.

Russell's troubles soured Northwestern Mutual executives on the business, ultimately resulting in the insurance company putting up the for-sale sign, multiple investment banking and industry sources said.

For its part, Northwestern has been spending time preparing the business for sale. Sources said Russell has been cutting costs and jettisoning some business lines. The ETF business, for example, was cut after two years because of slow asset growth. In 2010, Russell sold its private equity funds-of-funds unit, Pantheon Ventures Ltd., to Affiliated Managers Group Inc. and senior management.

While another asset management firm such as SEI Investments Co. or a large investment consultant or actuarial consulting firm would appear to be other natural buyers, sources said private equity firms are expected to be the most aggressive bidders.

Private equity firms and other alternative investment managers have been ardent pursuers of money management firms. Just last year, Grosvenor Capital Management LP bought Credit Suisse Group AG's private equity and real estate investment groups. Also last year, The Carlyle Group bought two more funds-of-funds firms to add to its 2-year-old acquisition of AlpinVest. And two years ago, Carlyle bought 60% of Los Angeles-based TCW Group.

Private equity firms would acquire the company using private equity fund capital, sources said, as Carlyle did for TCW.

“My opinion is that a number of private equity funds will certainly be in the (sale) process,” said Jeff Bunder, global private equity leader at Ernst & Young, New York. “But I have to say that's not necessarily any different than any other sector these days. It's a competitive market, especially for assets of size.”

The largest private equity firms have been able to raise megafunds and are searching for very large deals, he said. With very few of those possible transactions on the market, any deal of size will get a lot of attention from big private equity firms, he said.

These days, private equity firms are shopping for deals in the $3 billion to $5 billion range, with some firms willing to stretch up to $10 billion. That's up from the $5 billion to $7 billion range 12 to 18 months ago, Mr. Bunder said.

The amount of dry powder being held by private equity firms is one factor pushing them toward bidding, said Andy White, senior analyst at PitchBook Data Inc., a Seattle based research firm. U.S. private equity deals in the financial services sector grew to a combined $8 billion in 2013, up from $3 billion the year before, according to PitchBook data.

Worldwide, private funds invested $23.4 billion in 123 financial services companies in 2013, up from $13.5 billion in 136 deals the year before, according to Ernst & Young data.

The largest private equity firms with capital to invest in financial services companies are Carlyle, which closed the $13 billion Carlyle Partners VI last year; Warburg Pincus LLC, which closed the $11.2 billion Warburg Pincus Private Equity XI in 2012; and Advent International, which closed Advent Global Private Equity VII also in 2012.

Private equity firms with interest in investing in financial services companies have raised a combined $300 billion for large buyout funds — $1 billion or more — in the last several years, Mr. White said. This means “there is a lot of potential capital out there for deal-making,” he added.

But private equity firms won't be docile buyers and could be the least appealing option for Northwestern Mutual, investment bankers said. Private equity firms will most likely expect Northwestern Mutual to take part in the financing or to continue holding some equity ownership of Russell Investments — or both.

Northwestern Mutual most likely would prefer a strategic buyer or a holding company, they said.