Merged firm expects big payoff in 5 years

The company being created from the merger of Treasury Group Ltd. and Northern Lights Capital Group LLC will double its AUM within five years, its CEO predicts.

Andrew McGill, the CEO of Treasury Group who will be CEO of the merged entity, said the growth will come from the combined company's expanded distribution capabilities and expected additions to the roster of money management firms.

The money managers in which the two own stakes had a combined $46.2 billion in assets under management as of June 30, with $23.6 billion from Treasury Group and $22.6 billion from Northern Lights. (All assets in this story are in U.S. dollars. Included in the data for Northern Lights is WHV Investment Management LLC. Northern Lights does not own a stake in WHV; rather, it has an economic interest.)

The deal, announced last month, is expected to close in October. The combined company will retain the Treasury Group name.

No money changed hands in the transaction. Treasury shareholders received shares equal to 61% of the new company, while Northern Lights shareholders received shares equal to a 39% interest.

But the Northern Lights shares have no liquidity at full value until Treasury Group officials obtain a listing for stock on a global stock exchange, a process that is expected to take several years. Currently, Treasury Group trades on the Australian Securities Exchange.

Several sources say the restriction was designed to prevent the 27 Northern Lights shareholders from selling large blocks of their new shares immediately, which could drive down the price of Treasury Group stock.

Treasury Group, Sydney, owns stakes in eight boutique money managers. Northern Lights, Seattle, owns stakes in 12 managers, plus its economic interest in WHV. Six of the eight Treasury Group managers are in Australia and serve a client base dominated by Australian institutional investors.

Analysts who cover publicly traded Treasury Group say the merger will give the money management firms in its portfolio the ability to more easily distribute their investment strategies in the United States. Northern Lights has an eight-person distribution team in the U.S., and 10 of its managers are in the U.S.

“It's really good for Treasury Group shareholders,” said Martin Crabb, head of research at Shaw Stockbroking in Sydney.

“For an increasing amount of time they have been reliant on two managers within their stable, Investors Mutual and RARE Infrastructure,” he said. RARE and Investors Mutual, both based in Sydney, “have kind of crowded out the other boutiques that Treasury had a stake in. Treasury needed to bulk up and have greater exposure to global managers.”

Investors Mutual Ltd., a large- and small-cap value manager, has $4.6 billion under management. RARE Infrastructure Ltd., with $8.4 billion, specializes in listed infrastructure stocks. Combined, the two account for around 80% of Treasury's revenue, profits and more than half of its assets under management.

He said Treasury owns 47% of Investors Mutual and 40% of RARE Infrastructure.

Senior analyst Nicholas McGarrigle at brokerage firm Ord Minnett Ltd., Sydney, said RARE, which has had very strong performance, will be able to leverage Northern Light's distribution platform in North America.

“I think there is an opportunity to distribute RARE's products in the U.S. institutional and retail markets,” he said.

Mr. Crabb said RARE has had some success in the U.S institutional market on its own, and Northern Lights' distribution platform can help build on that. “For an Australian manager to build that kind of distribution capability from scratch would be next to impossible,” he said. (RARE, based in Sydney, maintains a one-person distribution office in Chicago).

Mr. Crabb said other Treasury managers are significantly smaller and contribute smaller profits.

“They are a bunch of rats and mice out there; they are just getting the crumbs,” he said of the other managers in the Treasury Group stable.

Northern Lights officials are leveraging the proposed deal even before the closing.

On Aug. 14, Northern Lights executives announced they were expanding ownership in two affiliates, Seizert Capital Partners LLC and Aether Investment Partners LLC, using a $42.6 million debt facility announced as part of the merger earlier in the month.

The company did not disclose its current stake in the asset managers, but Mr. Crabb said Northern Light's ownership stake in Seizert Capital was increased to 50% and for Aether, to 100%.

Seizert, a midcap and core equity manager in Birmingham, Mich., is Northern Light's largest, with $5.3 billion under management.

Aether, Denver, has about $1 billion in funds of funds that invest in real assets.

Mr. McGill, the CEO, said given its larger global presence and enhanced value, the combined company will be in a stronger position to raise capital for acquiring stakes in other money managers and to entice promising money managers to sell stakes in their businesses.

“We feel very comfortable about our room to grow,” he said.

Europe is fertile ground to gain inflows and Northern Lights' two-person distribution staff in Europe and Treasury Group's two people will have a larger selection of strategies to offer investors, said Jack Swift, a managing director and partner at Northern Lights.

Mr. Swift said executives also will be looking for money managers in Europe in which it can take stakes. Northern Lights already has a stake in Goodhart Partners LLP, London, which specializes in Japanese equities and absolute-return funds of funds and in Northern Lights Alternative Advisors, London, which seeds hedge funds.

Treasury Group owns Aubrey Capital Management, Edinburgh, a global equity manager.

Mr. Swift, based in Denver, will be a managing director in the combined company, as will Northern Lights co-founders Tim Carver and Paul Greenwood.

Messrs. Carver and Greenwood will also serve on the combined company's board of directors, along with Gilles Guerin, CEO of BNP Paribas Capital Partners and Jeff Vincent, CEO of Laird Norton Co. LLC. BNP Paribas and Laird Norton are the biggest investors in Northern Lights.

What attracted the two companies to each other was they have the same model, providing operational and distribution support, but keeping the investment teams in charge of the investment functions, Mr. Greenwood said. The investment team is key to a firm's success, and must remain autonomous, he said.