By Juliet Chung and Emily Glazer
Morgan Stanley is joining the hedge-fund retreat.
The New York investment bank is looking to sell its 19% stake in
the $17.5 billion London-based Lansdowne Partners LLP, according to
people familiar with the matter.
The attempted sale adds Morgan Stanley to a wave of banks
including J.P. Morgan Chase & Co. that bought into hedge funds
before the financial crisis and have been backing away because of
regulatory pressure to simplify their businesses. New limits on
ownership of relatively risky assets have played a role as well, in
some cases.
Morgan Stanley bankers have narrowed the list of potential
buyers after earlier approaching a larger group to determine their
level of interest in a piece of the hedge-fund firm, said people
familiar with the matter. The smaller group includes Boston firm
Affiliated Managers Group Inc.; Foundation Capital Partners, of
Greenwich, Conn.; and Neuberger Berman's Dyal Capital, some of the
people said.
One person estimated the stake could be worth as much as several
hundred million dollars. UBS AG is advising Lansdowne, which bets
on and against stocks and is one of Europe's larger hedge-fund
firms. It isn't clear whether any deal will materialize. The
Lansdowne stake doesn't give Morgan Stanley a seat on the firm's
board or management committee, according to a regulatory
filing.
Morgan Stanley executives have spoken publicly in the past
several years about evaluating their hedge-fund positions.
Banks snapped up hedge-fund stakes and entire firms outright
before the crisis, eager to get into what they saw as a lucrative
new business. But the crisis shrank the assets under management of
many hedge-fund firms. More recently, the Volcker rule, which
limits how much of their own capital banks can have in riskier
investments such as hedge funds and private-equity funds, has
thrown a wrench into those plans.
At the same time, a new pool of buyers has raised billions of
dollars to buy stakes both directly from managers and on the
secondary market, seeing a portfolio of such stakes as generating
attractive returns that don't move in tandem with the broader
market.
The estate of Lehman Brothers Holdings Inc. has been trying to
sell its 20% stake in the D.E. Shaw Group, Deutsche Bank AG has
agreed in principle to sell its 17.5% stake in Arrowgrass Capital
Partners LLP to Foundation, and Zurich-based insurer Swiss Re is
trying to sell its stake in hedge-fund giant Brevan Howard Asset
Management LLP.
J.P. Morgan and Highbridge Capital Management LLC, the
hedge-fund and private-equity fund firm it owns, have been in
discussions for months about J.P. Morgan possibly selling part of
Highbridge to its management team, according to people familiar
with the matter, who cautioned the situation was still fluid.
Some of these people said any buyback could occur over multiple
years. Highbridge has $27 billion under management, according to a
person familiar with the firm.
The existing arrangement has been mutually beneficial. It helped
J.P. Morgan get into alternative-asset management, while Highbridge
has gained as the bank has channeled assets from clients at its
private bank into Highbridge's funds.
Morgan Stanley's push into hedge funds has had mixed results.
Under then-Chief Executive John Mack, Morgan Stanley started on a
hedge-fund buying spree in 2006, acquiring FrontPoint Partners LLC
that year and minority stakes in Avenue Capital Group, Lansdowne
and Traxis Partners in 2006 and 2007.
FrontPoint, which was rocked by the 2011 conviction of a former
manager for securities fraud and obstructing a Securities and
Exchange Commission probe, has since shut down. Traxis closed after
the 2012 death of its founder, Barton Biggs.
Morgan Stanley has fared better with Lansdowne, which at $17.5
billion is near its peak size despite some recent stumbles in its
smaller funds. It managed more than $12 billion when Morgan Stanley
Investment Management bought the stake in 2006 for an undisclosed
amount.
Steven Heinz and Paul Ruddock founded Lansdowne in 1998 and
brought in Peter Davies and Stuart Roden a few years later to start
and run the firm's flagship investment vehicle, the Developed
Markets fund. The fund, now $15.5 billion, gained 11% last year,
according to people familiar with the firm.
That compares with 2% by stock hedge funds on average, according
to industry research firm HFR, and 13.7% by the S&P 500,
including dividends. The Developed Markets fund has posted an
average annual return of 14.2%.
Some of Lansdowne's other funds have struggled recently,
according to investors. Lansdowne's European Equity fund lost 4.3%
last year, while its Global Financials fund lost 12%. The firm has
named a new portfolio manager for the Global Financials fund
because William De Winton, who ran the fund for 11 years, decided
to step down from the role, according to a person familiar with the
matter. The handoff will occur April 1.
Some investors in Lansdowne say they are keeping a closer watch
than usual on the firm's performance. They note that the firm has
gone through significant change in the past few years, with its
co-founders retiring in 2013 and 2014 and some other changes in the
management of the firm and responsibilities of key personnel.
People familiar with Lansdowne said change occurs at every firm
and that they believe Lansdowne is well-positioned for the future.
The firm has a management team in place, including a chief
executive and chairman, and one of the people said Lansdowne's
founders had been scaling back their involvement over time.
Write to Juliet Chung at juliet.chung@wsj.com and Emily Glazer
at emily.glazer@wsj.com
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