Asset Management

Deutsche Bank plans for fund unit spinoff leave investors’ heads spinning

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Deutsche Bank wants to convince investors that an old-fashioned partnership structure is the way to go for its asset management IPO. Source: Reuters

Deutsche Bank is going back to the future as it prepares to spin off its asset management subsidiary in an initial public offering next year. In a pitch Tuesday to international investors in London, Germany’s largest bank beat the drum not only for the new listing, but for the parent bank itself as it tries to right itself after a turbulent year.

But the troubled bank doesn’t seem able to catch a break. In a surprise move, Deutsche announced that the spinoff would be structured as a partnership with shares – a traditional German legal form that will allow the parent bank to keep full control of the unit even if its shareholding falls below 75 percent. The structure has long been used by German companies, even large ones such as Henkel and Merck, to combine the advantages of a closely held firm with a public company, especially when a family wants to keep control.

But the initial reaction among international investors was critical. “Such an unequal treatment of shareholders doesn’t meet today’s requirements for good governance,” said one large fund manager. Another spoke of a “huge outcry” among institutional investors, who believe in equal rights for all shareholders.

The bank also announced that the unit, Deutsche Asset Management, the largest fund manager in Germany with about €700 billion ($828 billion) under management, will be rebranded as DWS – the original moniker of the fund group founded in 1956, and still the brand used for retail funds.

Deutsche is expected to float 25 percent of the unit to the public to raise about €2 billion, which will be used primarily to finance further growth of the unit. Spinning off one of its most profitable divisions is a key part of the bank’s restructuring strategy after a series of scandals and fines over the past year threatened its very existence.

“The KGaA structure increases complexity and may lead to a valuation discount.”

Ingo Speich, fund manager, Union Investment

In their pitch to investors, Deutsche officials forecast annual growth of 3 to 5 percent for the unit, while maintaining a margin of 30 basis points on average for the some 600 funds it manages. It intends to pay out a large dividend, 65 to 75 percent of net income, as a sweetener to investors – perhaps to appease them for the restricted shareholder rights.

The Deutsche unit ranks among the world’s top 20 on most lists. It employs 3,800 worldwide, including 900 analysts, and bank officials said Tuesday their goal is to maintain employment. While not in the same league as US money manager BlackRock, with some $5.5 trillion in assets under management or even European rival UBS with more than $2 trillion, the Deutsche unit is the fourth-biggest fund manager for retail clients in Europe and the second-largest manager of exchange-traded funds.

Deutsche Bank Chief Executive John Cryan, who was brought in two years ago to turn around the bank, has a lot riding on the success of the unit’s IPO. He has come under fire for the lack of tangible results for his efforts so far. Raising funds from the IPO and positioning the unit for growth would bolster his credibility. Deutsche Asset Management registered significant net outflows last year as a result of the reputational damage to the parent bank.

At the London meeting, Nicolas Moreau, chief executive of the unit, said that 80 percent of its actively managed and alternative asset funds had beaten their benchmark indices over the past five years. It wants to keep the emphasis on these higher-margin funds to maintain its profitability.

The new structure for the unit, known as KGaA, allows a separate limited liability company controlled by Deutsche to function as general partner with far greater rights than other shareholders. The parent bank can determine policy and change management at will, even without consulting the board. And it can maintain this control even below the 75-percent threshold that allows a majority shareholder to control a regular joint-stock company.

This gives Deutsche some flexibility in making further acquisitions via shares, for instance. If its shareholding falls below 50 percent, however, the unit must revert to a regular company form and Deutsche indicated it would set a threshold even higher to maintain the unusual structure.

That did little to quell the criticism. “The KGaA structure increases complexity and may lead to a valuation discount,” said Ingo Speich, a fund manager for Union Investment. Mr. Moreau defended the move, however. “Our future legal form underscores the closeness of Deutsche Bank to our business and at the same time guarantees us the operational independence to push forward our growth strategy,” he said.

This criticism aside, other investors welcomed the planned IPO for the unit. “The flexibility of management is heightened and its visibility in the market increases,” said Frank Mazzuoli, a fund manager at Franklin Templeton. “The planned worldwide use of the DWS brand, which is well known in Germany and Europe, seems sensible, in order to reinforce its prominence in the market and sales.”

The Deutsche officials said increasing market share abroad is an important component of its strategy. Currently, the lion’s share of the assets under management come from Germany and elsewhere in Europe, with about a third coming from America and the Asia-Pacific region. Somewhat less than half is from retail clients and the rest from institutional investors.

Daniel Schäfer is financial editor for Handelsblatt. Yasmin Osman and Anke Rezmer report on financial services from Frankfurt. Darrell Delamaide, an editor based in Washington, DC, adapted this into English for Handelsblatt Global. To contact the authors: schaefer@handelsblatt.com, osman@handelsblatt.com, and rezmer@handelsblatt.com.

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