Morning Coffee: Deutsche Bank's other merger partner. The worst named hedge fund

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It transpires that Deutsche Bank has been playing the dating game in earnest. While one would have thought that DB management had enough on their plate trying to get their deal with Commerzbank across the line, it seems they’ve also been indulging in a side-flirtation. The German bank is in “serious” talks with UBS about a merger of UBS’s asset management division (assets under management: €700bn) with Deutsche’s 79% owned subsidiary DWS (assets under management: €662bn, but with a much richer mix of retail vs institutional money, meaning that Deutsche would likely still be the main shareholder in the combined group).

It’s not obvious what the rationale for this deal is.  The suggestion from “people close to the discussions” is that the combined group would be the second biggest fund manager in Europe, and thus more able to compete with BlackRock and Vanguard.  This is … debatable.  BlackRock and Vanguard both have just under $6trn of assets under management; is it really a big competitive change to be a quarter of their size rather than an eighth?  And UBS and DWS don’t really play in the big US domestic index fund and ETF business lines where the majority of the assets under management are held.

Furthermore, economies of scale only show up if you’re capable of implementing them.  And Deutsche Bank’s track record in this area is not good.  When a bank has bought such great franchises in the past (Morgan Grenfell, Bankers’ Trust, Scudder, Sal Oppenheim and RREEF, to name some of the biggest historical names), and has so little to show for the goodwill it paid, analysts begin to conclude that there is a sort of “sick building syndrome” – good asset management businesses turn bad when they arrive at the two towers of Taunusanlage.

What’s more likely is that the potential UBS deal has something to do with the financing of the Commerzbank transaction.  It’s looking more and more as if the deal is going to create up-front capital requirements (particularly if it involves setting up a “bad bank” full of businesses and portfolios to be closed down).  Selling the remainder of DWS would certainly raise a lot of capital – Allianz had previously been said to be interested.  But selling the relatively stable asset management franchise would increase the proportion of volatile trading revenues, the opposite of what Christian Sewing wants to achieve.  So a merger transaction which keeps DWS consolidated in Deutsche Bank, but which potentially allows for a write-up of its value, would solve quite a few problems.

It might create problems in the long term for UBS, though.  The bank has been suggested as a “white knight” for Deutsche last year, a possibility that the shareholders appear to be less than keen on.  If, though, the well-capitalised Swiss bank has a joint venture and an interest in Deutsche’s success, it runs the risk of always being regarded by the regulators and markets as the potential “acquirer of last resort” in case Deutsche-post-Commerzbank runs into any future trouble.  Whatever UBS’ own concerns are about the market share and profitability of its asset manager, it might want to think several times about a deal which effectively sees it paying up for access to the Deutsche branch network.

Elsewhere in the industry, we may have conclusive proof that all the good names have been taken. With funding from Jeffries’ parent Leucadia Group, some partners at Blackstone and Carlyle have formed a new investment firm that intends to take stakes in medium sized private equity, real estate and hedge fund management companies.  They have called it … “Stonyrock Partners LP”.

Apocryphally, there are three ways of naming a new fund.  First, there’s the ego approach; name it after the partners’ initials, the road they live on, the sport they played in college or some such.  Second, there’s the “randomly selected Greek or Latin word”, either one vaguely related to money or one taken from maths and physics for the quant connotations.  And finally, there’s the “first thing I see when I open my eyes” approach.  This looks like possibly the way taken by Craig Schortzmann and Sean Gallary; perhaps they were walking through Central Part after a meeting and were taken by the sight of a particularly stony rock.  There might be some idea of subliminally referring to Schortzmann’s Blackstone pedigree to investors, but even so, this is not a great name.  They will be competing in the same space as Wafra Inc, Landmark Partners, Magnetar Capital and General Catalyst, apparently.

Meanwhile …

He’s not necessarily going to notice it in the context of his overall wealth, but SoftBank’s Masayoshi Son has managed to lose $130m by buying Bitcoin close to the peak (Wall Street Journal)

An interview with Jo Hannaford, Goldman Sachs’ head of technology for EMEA, who claims to be able to tell which one of her employees wrote a particular piece of code just by reading it (Yahoo Finance)

The UK’s FCA has issued a harshly worded open letter to brokerages about “complacency” with respect to conflicts of interest.  They’re particularly cross about the practice of paying formula-based commission to individual traders, with no scope for including non-financial measures like compliance performance in people’s remuneration. (Financial News)

On the other hand, the FCA’s chief executive is promising a “lower burden” and more principles-based approach to regulation post Brexit, so maybe the “complacency” is really just looking to the future. (FT)

An unusual hire – usually when you leave Goldman Sachs, you’re gone for good.  But Silvia Biscardi has been hired back from Barclays to run the European private capital markets team (Financial News)

Potential bad news for the banks which have staffed up in the smaller companies IBD space.  Small-ticket M&A seems to have disappeared as the year to date has been dominated by megadeals.  Lots of quiet time in the regional offices in Dallas and Milwaukee … (Bloomberg)

Credit Suisse’s head of blockchain says it’s a lack of entrepreneurial culture rather than any failings in technology that’s stopping banks from rushing into blockchain solutions, and that none of the partner banks he is working with have pulled funding for their projects (Business Insider)

Diversity training does little to change behaviour, according to a study from Wharton (FT)

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