Legg Mason, Inc. (NYSE:LM) and their subsidiary Permal Group finalized their acquisition of Fauchier Partners from BNP Paribas SA (PINK:BNPQY), a fund of hedge funds based in Europe. Permal itself was acquired by Legg Mason in late 2005 along with Citigroup Asset Management. With assets under management of $18.3 billion, Permal is ranked among the top ten largest FoF managers.
The new addition of Fauchier Partners to Legg Mason, Inc. (NYSE:LM)'s growing business in investment advisory comes at a time when FoFs are going through a dry spell. Clients have been pulling their investments from these funds, and Legg Mason will take a writedown of $750 million ($460-550 million after taxes) this year, partially on account of outflows from Permal accounts. The FoF industry as a whole has suffered their sixth straight quarter of asset outflows, with $4.4 billion withdrawn in Q3 alone.
The merger of Fauchier Partners to Permal Group will create a $24 billion fund of hedge funds, and the workforce of Fauchier will essentially move in with Permal, as the deal closes in the first quarter of 2013. The details and price of the buyout have not been disclosed. Fauchier is a $6.2 billion fund with business in UK, Europe, Asia and Australia.
The update from Legg Mason, Inc. (NYSE:LM) has not changed Bank of America Merrill-Lynch's stock rating of the company. In addition to the acquisition and writedown, Legg Mason, Inc. (NYSE:LM) also announced a new revenue distribution agreement with Permal, which will add another $6 million in expenses in Q4 and increase the comp ratio by 0.5 to 1 percent overall. BAML's analysis sees the acquisition as a good consolidating move in the FoF industry, one that would give LM much needed exposure in other regions where Fauchier manages investor money. The impairment charges were not surprising as well, given the low growth rates, higher discounts and fund outflows. However, none of this will impact Legg Mason, Inc. (NYSE:LM)'s deferred tax assets.
Permal Group's many funds have managed moderate returns in the year, the best performers were Permal’s Fixed Income Special Opportunities, that gained 10 percent through Q3 while the Special Global Opportunities fund was up by 9.9 percent in the same period.