The Carlyle Group, one of the world's biggest private-equity firms, is buying TCW, an institutional investment management firm based in L.A., with roughly $130 billion on the books and a good reputation for fixed-income. In fact, the bond side of what TCW does is such a big part of the business (about 60 percent) that David Lippman, who ran fixed income for TCW, will become CEO of the new, Carlyle-owned enterprise.
The last thing that popped TCW onto the radar was a meltdown in 2009 that involved its star bond trader, Jeff Gundlach. But there's a meltdown behind the Carlyle deal, as well. And it's all about how TCW former parent, French back Société Générale, is suffering from the ongoing eurozone crisis and from the aftermath of the financial crisis.
Banks around the world are now required to basically keep more money in the vault (so to speak). It's called the "Basel Accord," and it's now up to its third iteration, Basel III. SoGen, France's number two bank, is in the process of bolstering its balance sheet and cutting lines of business in order to comply with Basel III. It's been a rough time for the bank, which is suffering from its exposure to Greek debt — it wrote off three-quarters of its investment last year.
News of the TCW sale couldn't have come at a better time for SoGen. It just reported second-quarter earnings, and they weren't good. Critically, the bank took what's called a "goodwill writedown" on TCW in June. A goodwill writedown occurs when, as the Economist helpfully explained in 2009, various "intangibles" such as brand reputation of a firm are impaired. What it means as far as accounting goes is that the acquisition isn't as valuable as it was when you bought it, mainly because "goodwill" has been degraded.
SoGen's most recent goodwill writedown was $246 million. SoGen bought its majority stake — 51 percent — in TCW in 2001 for $880 million and Reuters suggests that the Carlye sale will amount to $700 million by the time the deal closes next year. So on its face it appears that SoGen may have roughly broken even. The new TCW will be owned by Carlyle, with SoGen's stake plus a smaller stake from Amundi, TCW management and employees, with 40 percent.
So SoGen gets what it needs, which is a boost to the money it needs to keep in its vault, per Basel III. And TCW gets what it wants, which is to compete with other major fixed-income asset managers, chiefly neighboring PIMCO in Newport Beach, with a whopping $1.8 trillion under manangement, but a leadership future that's unclear and that may lead to clients moving their money elsewhere.