Latest AIG sale item: B-D network

Private-equity investors appear to be leading the pack of likely buyers for the three broker-dealers in the AIG Advisor Group, which houses 6,571 representatives, according to a number of industry sources. About a half-dozen private-equity firms and one insurance company are thought to be in the mix. Names bandied about in the market as potentially in the running for the broker-dealers include Madison Dearborn Partners of Chicago and Summit Partners of Boston on the private-equity side, and insurers MetLife Inc. of New York and SunLife Financial Inc. of Toronto. John Pluhowski, a spokesman for AIG, declined to comment. A deal for the three firms — FSC Securities Corp. of Atlanta, Royal Alliance Associates Inc. of New York and the newly christened SagePoint Financial Inc. of Phoenix — could be concluded by the end of the month, sources said. New York-based JPMorgan Chase & Co. is the lead banker for the three broker-dealers. The network's head count fell 6% last year, and many observers said that more reps could flee unless the right buyer is found — and soon. Financial advisers are "aware that several private-equity firms are in the hunt," said Jeffrey Vahanian, president of Vahanian & Associates Financial Planning Inc. of Saratoga Springs, N.Y. The firm, which has $88 million in assets under management, is affiliated with Royal Alliance.
Sources also noted that reps and advisers might be more likely to welcome a private-equity transaction than an acquisition by another insurance company because of advisers' experiences in working with an insurer parent. Madison Dearborn has a recent history of transactions in the financial services industry. In 2007, it acquired Nuveen Investments LLC, also of Chicago, which operates a number of money managers. Spokesmen for Madison Dearborn and MetLife declined to comment. Private-equity investors have a prominent recent history in the independent-contractor-broker-dealer industry. In 2005, two firms, TPG Capital LP of Fort Worth, Texas, formerly Texas Pacific Group, and Hellman & Friedman LLC of San Francisco, bought a 60% stake in LPL Financial. That firm, based in Boston, has since mushroomed and now has close to 11,000 affiliated advisers. The three AIG broker-dealers are part of a broad dumping of assets by parent company American International Group Inc. The New York-based insurance giant is shedding a number of businesses to pay back government loans made necessary by its financial collapse in September. When AIG chief executive Edward Liddy first announced the sale of certain assets in October, the broker-dealers were lumped to-gether with other businesses from AIG Retirement Services. Now it appears more likely that the broker-dealers will be sold on their own, a source said. Most recently, AIG's money management unit has been put on the block (InvestmentNews, Feb. 2). Any deal for the three broker-dealers comes with questions. Advisers and industry observers are anxious to know the following: • Will current management, led by AIG Advisor Group CEO Larry Roth, remain in place? • Will the back offices of the broker-dealers be combined in any way, potentially harming each firm's culture? • And what kind of retention bonus will a private-equity buyer include as part of its package to buy the firms? There is no consensus among investment bankers and analysts on whether it makes sense for private-equity investors to buy retail-brokerage firms at the moment. "Generally, private-equity groups are well-capitalized, and they have to put that to use," said an investment banker, who asked not to be identified. Private-equity funds generally have a few years to invest money collected from investors, the banker said, and then another five years or so to exit or sell the investment. In the current market, lending has dried up too, giving an edge to private-equity funds, the banker said, adding: "Leverage is often no longer available, but valuations are down. So private-equity remains compelling."

RISKY BUSINESS

One analyst with experience at private-equity shops disagrees with that assessment. “I think it’s highly unlikely that PE firms start looking at broker-dealers, for a number of reasons,” Daryl Jones, managing director with Research Edge LLC of New Haven, Conn., wrote in an e-mail message. He noted that the retail-brokerage business is fraught with risks, including potential legal problems from advisers’ giving bad advice, and the fact that it is a highly regulated industry. “PE firms do not like this government risk,” Mr. Jones wrote. E-mail Bruce Kelly at bkelly@investmentnews.com.