Russell clients stay put despite looming sale

No significant defections at Russell Investments' consulting and money management unit have been reported since parent London Stock Exchange Group PLC first announced it would be buying the firm in June, asset owners and industry insiders say.

London Stock Exchange executives never made a secret of their plan to potentially sell off the non-index portion of Russell Investments. On Feb. 5, the LSE made it official, and noted it had “a number of expressions of interest” for the business.

Insiders expect LSE officials to announce by mid-April a $1.2 billion to $1.5 billion price tag for Russell Investments' asset management business.

Clients contacted by Pensions & Investments are sticking with Russell for now. The majority mentioned how open Russell officials have been about the prospective change in ownership.

The Boeing Co., for example, has no plans to change. “They have communicated openly about the status of their ownership,” said Bernard Choi, spokesman for Boeing, Chicago. Russell Investments is a consultant for Boeing's $61.1 billion defined benefit and $45 billion defined contribution plans.

David Graham, communications manager at another Russell client, the $14.4 billion Ohio Police & Fire Pension Fund, Columbus, said in en e-mail: “We expect to continue our current relationship with them. We are aware of the situation and are monitoring. Our contact at Russell is keeping us abreast of the situations.”

Russell manages $200 million in domestic equities and $450 million in international equities for the Ohio pension fund. It also provides the beta exposure for the pension fund's U.S. equity portable alpha program as well as a derivatives-based international equities exposure and a targeted tracking error securities-based portfolio in non-U.S. equities.

Staff at another Russell client, the $30.2 billion Indiana Public Retirement System, Indianapolis, “has been in constant communication with Russell regarding possible ownership changes,” Jennifer Dunlap, public information specialist, said in an e-mail. Plan officials will “continue to monitor them closely,” she said.

Officials at the San Francisco City & County Employees' Retirement System, where Russell helped construct the glidepath for custom target-date funds in its $2.7 billion deferred compensation plan, are expected to discuss Russell's potential ownership change at a March 18 meeting, Norm Nickens, retirement board secretary, said in an e-mail.

Consultants and competitors, who declined to be identified, also say they haven't seen signs of client defections. “I'm not aware of a single client that is walking away — there is no rush for the door,” said one London-based source in the money management industry.

Katherine Stouffer, Russell's director of communication, said in a statement: “Institutional investors are continuing to gravitate to a dynamic, multiasset investing approach to help them meet their investment outcomes. As a result, we see ongoing commitment from existing clients as well as interest from prospects.”

Some clients are waiting to see who ends up buying Russell Investments' non-index business, sources said.

LSE executives aren't commenting on the impending sale beyond their Feb. 5 announcement, Mark Benhard, LSE spokesman, said in an e-mail.

The announcement said after conducting a “comprehensive review focused principally on assessing the strategic fit of Russell Investment Management with the group's long-term strategy,” LSE executives decided to sell it and keep Russell's index business.

Observers disagree on where private equity firms would fit on a list of potential buyers.

Some say PE firms are the most likely candidates because they can make attractive returns by restructuring the business, a technique in which several private equity firms have an expertise.

Possible buyers include KKR & Co, Hellman & Friedman LLC, Apollo Global Management LLC, The Carlyle Group LP and Genstar Capital, multiple people said. Officials at KKR, Hellman & Freidman, Carlyle Group and Genstar declined comment. An Apollo spokesman couldn't be reached by press time.

“Asset management companies have tended to attract a lot of attention from private equity firms,” said Grier Eliasek, president of New York-based business development company Prospect Capital Corp., which finances private equity deals and makes private equity investments.

Private equity firms are drawn to money managers for the attractive valuations, scalability of the businesses and profit potential, he said. Asset management firms also generally get “decent financing,” he added.

Donald H. Putnam, managing partner at Grail Partners LLC, San Francisco, said he does not believe a traditional money management firm would bid because of a potential conflict between Russell's consulting business and a money manager's business.

One problem for a private equity firm is that clients may leave knowing the private equity firm would need to exit the investment, possibly by selling it again in three to five years, sources said.

One London-based source in the money management industry noted Russell has just gone through one transaction, which could have already unsettled clients. “If they then go to a private equity group, that would be further unsettling and in three to five years hence, there will (probably) be another transaction,” said the source, who declined to be identified.

Even so Russell's consulting and money management arm “should be generating some robust interest” from potential buyers including private equity firms, said Peter Lenardos, London-based analyst at RBC Capital Markets. “I think it is going to be a broad set of people looking at the business.”

“Insurance companies in both Europe and the U.S. with pension solutions businesses — that definitely makes sense. U.S. and Canadian banks will be interested, and U.S. HR firms with employee benefits-type businesses, too,” Mr. Lenardos said.

European money managers also might be possible buyers, but few have the spare cash, he said.

Reporter Randy Diamond contributed to this story.