Merger Monday came a day late for Seattle-based Quellos Group, which said Tuesday it was selling its core asset-management business to giant...
Merger Monday came a day late for Seattle-based Quellos Group, which said Tuesday it was selling its core asset-management business to giant money manager BlackRock for as much as $1.72 billion.
The deal, expected to close Oct. 1, will make New York-based BlackRock a major presence in the world of alternative investments — particularly the “fund-of-hedge-funds” business that Quellos has made its specialty.
“If BlackRock started a fund-of-hedge-funds business tomorrow, it probably would take them 10 years for anyone to take them seriously,” said Rachel Barnard, a financial-services analyst with Chicago-based Morningstar. “But with Quellos, they’re buying a track record.”
For its part, Quellos gets access to BlackRock’s lengthy client list, and its stakeholders — from former employees to co-founder and Chief Executive Jeffrey Greenstein — get the chance to cash out their positions in the closely held firm.
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It’s unclear what the deal means for Quellos’ 290 employees, 250 of whom work at Two Union Square. BlackRock Chief Executive Laurence Fink said he expected most of Quellos’ staff members to stay on; the company said it would maintain a “significant presence” in Seattle.
Quellos made its mark with funds of hedge funds, also known as multimanager hedge funds. Such funds invest clients’ money in a portfolio of preselected hedge funds — those low-profile, often highly leveraged investment vehicles for the superrich.
The pitch: Quellos’ investment professionals can select the best-performing hedge funds, and combine them with other hedge funds in such a way as to reduce the investor’s overall risk.
At the end of 2006, Quellos’ fund-of-hedge-funds business had $17.4 billion in assets under management, making it the 12th-largest such business in the world. The firm also has about $2.5 billion in private-equity investments, spokesman Michael Gross said, for a total of about $20 billion in managed assets.
Those businesses will be combined with BlackRock’s much smaller funds-of-funds operation (about $5.4 billion in assets under management) to form BlackRock Alternative Advisors. That unit will be run by Bryan White, Quellos’ chief investment officer and other co-founder; Greenstein will retire.
“They’re buying a great group,” said Doug Hockersmith, head of wealth management for Pacific Portfolio Consultants, a Seattle firm that manages about $1.2 billion. “The talent there is excellent — they know everyone in the hedge-fund space.”
Though the combined operation would rank as the ninth-biggest fund-of-hedge-funds manager in the world, it still would be a relatively small part of BlackRock’s overall business. As of March 31, the company had $1.154 trillion in assets under management.
BlackRock will pay Quellos’ partner-owners $562 million in cash and $188 million in stock upfront, up to $375 million in cash and stock over the next 18 months, and up to $595 million in cash by 2010. The two latter payments are conditioned on the Quellos business meeting certain performance goals.
As a multiple of operating profit, that’s in the same neighborhood as the 2005 acquisition by Legg Mason of a majority stake in Permal Group, one of Quellos’ competitors in the fund-of-hedge-funds business, said Morningstar’s Barnard.
The deal doesn’t include Quellos’ dormant tax-advisory business.
The firm’s involvement in several tax-avoidance schemes a decade ago has enmeshed it, along with several big banks, accounting firms and law firms, in a criminal inquiry by the U.S. Attorney’s Office in Seattle, a federal grand-jury investigation in New York, an IRS probe and multiple civil lawsuits.
BlackRock said it won’t assume any potential liabilities related to the former tax-shelter business.
Late last year, Quellos’ Gross said, the firm discontinued its wealth-management arm, in which advisers helped wealthy individuals with everything from broad asset-allocation decisions to making sure their monthly bills were paid. Fewer than 20 employees in New York and Seattle left the firm, many taking their clients with them.
The BlackRock deal opens the window a bit on Quellos, a low-profile firm even within the secretive world of hedge funds.
The firm took in $131 million last year in management fees and $170 million in performance fees, according to an investor presentation prepared by BlackRock.
Management fees are calculated as a percentage of total assets under management; performance fees represent a share of investment gains.
About 80 percent of Quellos’ managed assets come from pension funds and other institutional investors; about 55 percent come from overseas.
For BlackRock, the Quellos deal represents the latest phase of its evolution from a relatively small bond shop to a diversified investment powerhouse.
The company bought State Street Research in 2005 and combined with Merrill Lynch Investment Managers in October.
Drew DeSilver: 206-464-3145 or firstname.lastname@example.org