Future of DeAM questioned amid turmoil of parent

As Deutsche Bank AG works out the details of paying a multibillion-dollar U.S. government fine, and pundits worldwide consider the future of the bank, asset owners and consultants are pondering what it all means for Deutsche Asset Management.

The bank has been working out a deal with the U.S. Department of Justice, which is asking for $14 billion to settle civil claims in connection with the bank's issuance and underwriting of residential mortgage-backed securities and related securitization activities between 2005 and 2007.

In a statement on its website Sept. 15, Deutsche Bank said it “has no intent to settle these potential civil claims anywhere near the number cited.”

On Sept. 28, Germany's Federal Ministry of Finance denied it was preparing rescue plans for the bank.

DeAM spokeswoman Oksana Poltavets declined to comment.

Deutsche Bank shares have fallen more than 45% this year, through Oct. 13, and were trading just above €12 ($13.18).

Deutsche Bank CEO John Cryan has insisted that the German bank has no intention of selling the asset manager. In a letter to employees on Sept. 12, Mr. Cryan said: “There is one rumor in particular that I would like to dispel by making it unambiguously clear that Deutsche Asset Management is and will remain an essential part of our business model.”

In support of that position, the bank last month sold Abbey Life Assurance Co. Ltd. out of Deutsche Asset Management.

Mr. Cryan said the deal allows the bank to “continue to focus on its core businesses of active, passive and alternatives, while this transaction will also strengthen Deutsche Bank's capital position.”

The asset management business has been dealing with failed sales attempts, multiple reorganizations, leadership shuffles and numerous resignations over the past four years.

Data from Pensions & Investments show that Deutsche Asset Management's assets under management totaled $846.82 billion as of Dec. 31, down 33% from the year earlier.

Meanwhile, due to Deutsche Asset & Wealth Management's pending split into separate units in January, Deutsche Asset Management's U.S. institutional tax-exempt AUM was $1.8 billion as of Dec. 31, down 84.5% from the year before. (Deutsche reported its year-end AUM figures as if the split had already occurred.)

Some industry observers think that although selling off the asset management business might be unlikely, if Deutsche requires capital, it might not have a choice but to sell — at least parts of it.

“Deutsche Bank would have to consider selling DeAM if they had to raise capital. Given the depressed share price, the dynamics around a dilutive capital raise are challenging, and a sale of DeAM would present a potentially more attractive alternative to fill a capital hole,” said Domonkos L. Koltai, a partner and co-founder of investment bank PL Advisors, New York.

Mr. Koltai added: “The likelihood of that scenario depends on the size of the settlement with the DOJ. The latest rumors (of $4 billion to $5 billion) suggest that a capital raise won't be necessary.”

Another investment banker who asked not to be identified told P&I: “Deutsche may have no choice, but it is not an attractive option for them (and) would be a lot of work to separate.”

Timothy R. Barron, Chicago-based chief investment officer at Segal Rogerscasey, said that while he was unable to speculate about the fate of either Deutsche Bank or Deutsche Asset Management, the asset management business in general “can be a highly profitable and not terribly complicated part of a financial services firm.”

Mr. Barron said a potential buyer “would want specific capabilities that fit their directional needs” and “fill out their current suite” of investment offerings.

Meanwhile, U.S. clients with whom P&I spoke said they are monitoring the situation.

Jonathan Grabel, chief investment officer for the $14 billion New Mexico Public Employees Retirement Association, Santa Fe, said in a phone interview that the pension plan has “duty to be responsive to headline risk” but “not overreact to it.”

“This is something we will monitor and discuss with our board,” Mr. Grabel added. “We need to be thoughtful, measured and deliberate.”

New Mexico PERA has $200 million invested in a listed infrastructure strategy with Deutsche Asset Management.

Jamie Hamrick, senior investment officer and head of private markets for the $6.8 billion San Diego City Employees' Retirement System said in an e-mail that Deutsche Bank's situation with the Justice Department has not yet impacted SDCERS' relationship with Deutsche Asset Management.

“SDCERS has been in close communication with Deutsche Asset Management and will continue to monitor the situation for any potential impact to SDCERS or its portfolio,” Ms. Hamrick said. “In addition, SDCERS's real estate consultant, Aon Hewitt, has been in discussion with Deutsche Asset Management on their organizational issues and is not recommending any action to be taken at this time.”

SDCERS currently has $400 invested with Deutsche Asset Management in a core real estate strategy.

Other institutional clients that P&I contacted either did not respond to requests for an interview or declined to comment.

Industry observers with whom P&I spoke speculated that if the bank were to sell the asset management division, the price tag would probably be somewhere between $1.5 billion and $2 billion, with such managers as BlackRock Inc., Invesco Ltd., Franklin Resources Inc. and Aberdeen Asset Management PLC being potential bidders.

Deutsche Asset Management has seen considerable change over a rather short period of time.

In 2012, Deutsche planned to sell the asset management division to New York-based Guggenheim Partners LLC. But failing to get the price it wanted, the potential deal evaporated.

Later that year, the bank announced it was merging its asset and wealth management businesses to create Deutsche Asset & Wealth Management.

Deutsche Bank announced last October that starting in 2016, Deutsche Asset Management would be be split out of Deutsche Asset & Wealth Management and operate as a stand-alone unit under the leadership of former BlackRock executive Quintin Price.

However, Mr. Price took a medical leave of absence in April, and then asked the company to end his contract effective June 15.

Effective Oct. 1, former AXA France Chairman and CEO Nicolas Moreau stepped in to replace Mr. Price as head of the asset management unit.

And in September, Deutsche Bank agreed to the sale of Abbey Life Assurance Co. to Phoenix Life Holdings Ltd. in a £935 million ($1.2 billion) deal.

Separately, Deutsche Bank Securities agreed to pay $9.5 million to settle Securities and Exchange Commission claims that it did not safeguard private information created by the firm's equity research analysts when speaking with its clients as well as its sales and training staff, the agency announced Oct. 12.