Embattled money manager TCW plays 'let's make a deal'

TCW Group is giving top employees a 20% equity stake and is increasing fee-sharing arrangements with key investment teams as company executives attempt to put the Jeffrey Gundlach saga behind them, stabilize the business and attract new assets. In an interview with Pensions & Investments, CEO Marc Stern said the compensation changes have enabled him to play a game of offense as he looks to grow TCW's business. The changes follow the ouster of Mr. Gundlach, chief investment officer, in December. Within 10 days, Mr. Gundlach formed DoubleLine Capital LP, and 45 of his 60-member fixed-income investment team followed him. As a result, Los Angeles-based TCW lost more than $18 billion in assets from clients terminating the firm, some of whom moved to DoubleLine. The removal of Mr. Gundlach, who was involved in a dispute over control of TCW, also opened up a series of festering issues over employee compensation that had other teams threatening to leave. “It was clearly a rough few months,” Mr. Stern said in an interview. But Mr. Stern, in his first extensive interview since Mr. Gundlach's departure, sees rapid growth for his company. He predicted that TCW's current $115 billion in assets under management will double within four years through acquisitions, increased inflows and strong financial results. If it happens, it would be quite a turnabout for the subsidiary of French banking giant Societe Generale S.A. Mr. Stern, a former longtime president of TCW, was serving as its vice chairman when he became CEO last June. He said what is important is that the company is moving forward. One key element: more money for some employees through an equity ownership plan. Mr. Stern said 175 of TCW's 700 employees — investment professionals, marketers and administrative staff — will be eligible for the incentive plan. That program, he said, will be “very useful in aligning people's interests with the overall interest of the company,” as well as lucrative for employees. “Hopefully, we will make some people wealthy along the way,” he said. Mr. Stern said Societe Generale executives understand the need for the equity program. “In relation to equity, the calculation that a firm like SG does is that if we motivate and incentivize our people, we keep the good people,” he said. Jacques Ripoll, head of Societe Generale Global Investment Management & Services, Paris, said in a statement: “The new equity plan will serve to create an ownership culture at TCW and effectively aligns employees' interest with those of TCW and Societe Generale.” Ownership issue Employee ownership at TCW has been a sticky issue since at least 2001, when Societe Generale first purchased 51% of the manager. The bank increased ownership to 100% by 2007, but never followed through on a plan to distribute 30% of the equity to TCW shareholders. Rather than TCW stock, some employees received SocGen stock options, which created bad will among employees. “There was a lot of resentment at the lack of employee equity,” said one senior employee, who asked not to be identified because she still works at the company. “People felt they weren't being fairly compensated,” said one person with knowledge of the situation, who asked not to be identified. Mr. Stern said he could not address past issues, but said the new equity ownership will be in restricted shares of TCW stock convertible to full unrestricted shares following a five-year vesting period. TCW employees will get partial vesting rights within 18 months, he said. “There is value from day one,” he said. Mr. Stern said the new financial arrangements have employees looking ahead. “I think that this is really re-energizing the people and looking to the future and where the firm goes from here,” he said. Deals have been reached to keep two key teams — energy/infrastructure and small-cap/smidcap growth — although the price tag might have been steep. Sources say the energy/infrastructure team will get more than 50% of the fees. That will increase to 100% within 10 years, when the firm is to become independent. The small-cap/smidcap team will be allowed to keep almost 50% of the fees it generates, sources said. Money management teams typically get about 20% of the fees they generate. Mr. Stern said he couldn't talk numbers. A top company official, who asked not to be identified, said the fee split for the small-cap/smidcap team is nowhere near 50-50. The TCW official did say that the energy/infrastructure deal was lucrative for team members and confirmed that TCW's slice of the revenue declined to zero over the course of 10 years. Mr. Stern said in the deal struck with the energy/infrastructure team, the group will operate under the TCW umbrella, but gradually will gain more autonomy over the next decade. “What we negotiated was a long-term relationship that goes through 2020 where, over the period of time, we will be in business together, during that time they will become more self-sufficient and operationally independent,” he said. At the end of the 10 years the agreement calls for the group to operate independently. Absorbing cost Mr. Stern said he wasn't concerned that increased revenue sharing would be a hit to profitability. “A number of these deals are structured in a way that people (on the teams) absorb more of the cost and so if the business grows, yes, they will receive more. But if we don't grow, they won't. I expect our profit to increase significantly.” Negotiations continue with a third team, the TCW/Crescent Mezzanine. That team is owned by TCW, but operates out of its own offices in West Los Angeles. It was purchased by TCW in 1995. The team, one of TCW's largest, has 75 employees and more than $11 billion in assets under management. Mr. Stern said he expects an agreement by July 1. “We are in negotiations with them now to try to reach a long-term arrangement; we would all like that to happen,” he said. “If that doesn't happen we will have a series of arrangements with them (as a subadviser) and the clients will continue to get their services, and it will continue and remain to be client-friendly.” Mark Attanasio, managing director of the team and the owner of the Milwaukee Brewers baseball team, said he was hopeful an agreement could be put together. “We would like to work it out,” he said. “It's been a good 15 years.” He would not go into details about the contract negotiations but did say, “The ball is in TCW's court.” Mr. Stern said TCW has around a dozen investment teams and none of the others has threatened to leave. “We have good long-term arrangements with most of them,” he said. While the teams have generally operated independently, Mr. Stern said he hopes the stock ownership plan will encourage collaboration as team members realize they have a common purpose in TCW doing well economically. Societe Generale's financial statements do not break down results for TCW, but Mr. Stern said the firm has been “very profitable.” He said the bank liked the investment management business because it produced income without an enormous amount of capital requirement. “They are very interested in helping us grow and move forward,” he said. Mr. Stern said the bank's interest in growing TCW was the reason it funded the acquisition of Los Angeles bond manager Metropolitan West Asset Management LLC in December. MetWest replaced the Gundlach team and brought in $30 billion in new assets under management to TCW. While Societe Generale executives last year said they wanted TCW listed on a stock exchange in the next five years, Mr. Stern said nothing is imminent. “If you are referring to the next couple of years, I would be very surprised,” he said. “We have a plan of growth that we plan to execute, but we will not be in the IPO market anytime soon,” he said. Mr. Diamond is a reporter at sister publication Pensions & Investments.