Stake in Hedge-Fund Firm Brevan Howard Is for Sale
Its Flagship Fund Ends Streak of Yearly Gains
A piece of one of Europe’s largest hedge-fund firms is on the block.
Zurich reinsurer Swiss Re is looking to sell its minority stake in Brevan Howard Asset Management LLP, which manages more than $30 billion in several hedge funds, according to people familiar with the talks. The effort comes as Brevan Howard grapples with recent poor performance and billions in investor outflows.
Bids for the 15% stake, which is being pitched to several potential buyers, were due last week, the people said. It wasn’t clear who the possible bidders were.
The investment has been profitable for Swiss Re given Brevan Howard’s swift growth since the reinsurer bought into the hedge fund in 2007, said a person familiar with the matter.
People involved in the process pegged the current value of the stake at anywhere from $350 million to $500 million. Swiss Re didn’t disclose what it paid for Brevan Howard, which is based in the Channel Island of Jersey.
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Swiss Re is seeking to boost investment in other areas, the person said.
The potential sale adds to a spate of deal activity in the hedge-fund industry. As banks, traditional buyers of minority stakes in hedge funds, have stepped back from such assets to comply with stricter rules on managing capital and risk, investment firms have stepped into the void, raising billions of dollars in recent years to buy minority stakes in hedge funds or using their balance sheets to fund such deals.
There is no guarantee there will be a buyer, or that the stake will receive as high a price as the suggested range.
Swiss bank UBS AG is running the sale. The new owner of the stake would share in the firm’s profits.
Co-founded by Alan Howard , a former trader for Credit Suisse who left in 2002 with others to start the firm, Brevan Howard is a so-called macro fund, which seeks to anticipate trends in global markets such as interest rates or currencies. Its assets climbed from $12.5 billion in assets under management at the start of 2007 to $40 billion at the end of 2013. Recent struggles have helped reduce the company’s assets.
The attempted sale comes during a tough period for Brevan Howard, which has stumbled recently amid broader challenges for macro funds. The Brevan Howard Master Fund, the firm’s $24 billion flagship fund run by Mr. Howard, lost about 0.8% last year—its first loss since it was founded in 2003. That followed a 2.7% return in 2013, compared with a 0.4% loss on average by similar funds, according to research firm HFR.
The fund’s average annualized return is about 10% since its inception, compared with around 5.7% for macro funds on average for about the same period.
Other Brevan Howard funds have struggled, too. The firm is in the process of winding down its $630 million commodity hedge fund after recent poor performance. The firm also closed its currency and emerging-markets funds last year.
Meanwhile, Brevan Howard has been engaged in a legal tussle with co-founder and former star trader Chris Rokos, who left the firm in 2012 and is contesting a noncompete restriction with the hedge fund.
A person familiar with Brevan Howard said inflows from institutional investors have offset some of the recent redemptions and that other factors, such as a recent deal to shift more than $4 billion in assets to another investment firm, played a role in shrinking how much money the firm manages.
Swiss Re acquired the stake amid a wave of similar deals before the financial crisis as firms and banks sought to capitalize on the rapidly growing hedge-fund industry.
After a retrenchment brought on by the crisis, the industry has grown well beyond its 2007 peak in terms of assets under management. Yet many funds have struggled to meet investors’ expectations of performance amid bull markets. Last year was one of the worst for hedge-fund performance since 2008.
Still, buyers remain interested in acquiring stakes, saying that they can create a steady revenue stream—of particular appeal in a low-interest rate environment—and that diversified portfolios of such stakes can provide returns that are little correlated to the markets.
Veteran deal makers say selling stakes on the secondary market is often more complicated than direct-stake sales, when the hedge fund itself is selling a piece of its management company to a buyer. That is partly because more parties are involved and because their interests may not align as closely.
In one such situation last year, the estate of Lehman Brothers Holdings Inc. wasn’t able to complete a deal to sell its 20% stake in the D.E. Shaw Group. Boston-based Affiliated Managers Group Inc. had been nearing an agreement to buy the stake for more than $500 million in a deal that would have valued D.E. Shaw at more than $2 billion. But the deal, run by Goldman Sachs Group Inc., stalled as AMG sought to expand the terms beyond what Lehman had negotiated, according to a person familiar with the process.
The eventual buyer was expected to assume the terms Lehman had negotiated for the stake in 2007.