In a move to focus on its core asset management business, Julius Baer, Switzerland’s largest private bank, is carving out its brokerage unit in a sale to Lightyear Capital.
Terms of the deal were not disclosed, but in order to complete the deal, Julius Baer will pay off a $42 million restructuring tab. “The deal materialized because Julius Baer wanted to reduce its private equity activities, and they asked us to find a new strategic partner,” said Stephane Michel, CEO of the brokerage unit.
Lightyear used its $750 million inaugural fund for the transaction.
The brokerage unit hired Swiss intermediary MilleniumAssociates to send the book around in April 2003, and according to Michel, five firms made it to the final round of the auction. He cited personal relationships as the top factor in choosing Lightyear.
“The brokerage business is a people business, we wanted our staff to buy into the deal and it was a consensus among management,” Michel said. “It was not a question of price. Don Marron [Lightyear chairman and CEO] has built a tremendous reputation in the brokerage business, and we thought his involvement would generate opportunities in the U.S. and in Europe.” Prior to running Lightyear, Marron served as chairman and CEO of PaineWebber Group for seven years and spent nearly a decade as president at brokerage house Mitchell Hutchins.
The deal was finalized in October and Lightyear now owns approximately 75% of the brokerage unit, with Julius Baer retaining 15% and the brokerage unit management team holding the remainder. Michel said plans include adding to the total of 50 analysts currently covering more than 600 stocks in 15 countries. Made up solely of institutional clients, the breakdown of customers by country is spread mainly throughout five countries including the U.K. (25% of clients), Germany (15%), the U.S. (15%), France (14%), Switzerland (10%) and Italy (8%).
After first opening a new office in the U.K., where 30% of the unit’s daily transactions already occur, Lightyear will then look to grow the soon-to-be-renamed Julius Baer spin-off in Eastern Europe, specifically in Poland, Czechoslovakia and Hungary. And with just 10 people staffing the U.S. offices, Michel also sees the U.S. as a prime target for immediate growth.
“The regulatory trends favor this business, and the demand for equities will grow,” said Marron. “Europe has the biggest unfunded pension liabilities and in order for that to get resolved, they must achieve higher returns. They can only get that through the equities market.” Lacking the cash in pension accounts to cover the growing obligation of the employees they cover, Marron said European pension funds need massive restructuring, and over the next five to 10 years, investing in private equity will increase dramatically on the continent.
As with others in the brokerage business, due to consecutive years of transaction volume drops and tumbling stock markets, the brokerage unit has seen some tough times of late. The unit suffered losses of approximately $15 million during the first half of 2003, more than doubling the nearly $7 million the unit racked up in 2002 losses.
Lightyear’s Accountant: Ernst & Young
Lawyers: Lightyear: Simpson Thacher & Bartlett; Julius Baer Brokerage: Willinski, Scott & Associates; Julius Baer Group: Law & Finance Consulting
Advisors: Lightyear: Aon (Insurance due diligence); Julius Baer Group: MilleniumAssociates AG (M&A Advisor)