Bank of America Corp.'s (BAC) Merrill Lynch Alternative Investments LLC unit announced Monday that it had agreed to sell its fund of hedge funds portfolio, with $1.2 billion in assets under management, to Man Group plc, in what some industry sources see as a move to help the financial institution keep up with new requirements under the Volcker Rule.
The deal, which is set to close in the second quarter of 2015, calls for London-based Man Group to make an upfront payment of $2.9 million in addition to paying 35% of the net management fees generated by the portfolio over a five-year period. Total earn-outs can not exceed $30 million.
Two industry sources said the deal is likely connected to new regulations implied under the Volcker Rule section of the Dodd-Frank Act, which officially came into effect as it presently stands in December 2013, that limit big banks' exposure to hedge funds and private equity investments. Bank of America did not immediately respond to calls seeking comment.
One provision of the rule requires big banks to divest most of their investments in most other hedge funds and private equity businesses they own a stake in by July 2015. However, they may be given some additional time to cash out of some of these investments.
The big banks can launch hedge funds and private equity funds on behalf of their own clients, as long as they cut their stakes down to 3% within a year after setting up those funds.
Bank of America is the latest financial institution to rid itself of assets in connection with the Volcker Rule, but is likely not going to be the last, said one source.
At the end of last year, Citigroup Inc. (C) announced it would spin off its Metalmark Capital Partners private equity unit. On Aug. 1 Citi said it had sold $1.2 billion of its limited partnership interest in Metalmark Capital Partners II to Lexington Partners. The amount represents 80% of Citi's $1.5 billion limited partnership interest in Metalmark's $2.5 billion fund, the remaining 20% will be sold to existing investors.
On Aug. 12, JPMorgan & Co. (JPM) announced plans to sell half of its private equity portfolio One Equity Partners LLC to AlpInvest Partners NV, run by the Carlyle Group, and secondary investor Lexington Partners, for undisclosed terms.
One source pointed to Goldman Sachs Group Inc. (GS) as the next group that could look to sell its hedge fund or private equity holdings, though it has been moving out of that business slowly. As of March 2014, Goldman had withdrawn more than $2.3 billion from hedge funds over a two-year period, according to a regulatory filing, Goldman and some of the other big banks have reportedly been working behind the scenes to delay the provision that requires them to sell these types of operations.
Goldman did not respond to calls and e-mails seeking comment.
For Man Group, the deal follows its July 9 deal for Summit, N.J.-based investment firm Pine Grove Asset Management LLC, The newly acquired funds, as well as Pine Grove, will be managed by Man Group's fund of hedge fund arm, FRM.
"We are excited that Merrill Lynch has selected FRM as the steward of its world-class portfolio of multi-strategy and strategy-focused funds," said Michelle McCloskey, senior managing director of FRM, in a statement. "We look forward to continuing to deliver high quality products and services to Merrill Lynch's clients, while expanding the investor base globally as investors increasingly seek exposure to alternative investments."
Man Group said in a release that the acquisition highlights a further push into the U.S., a broadened portfolio of U.S. SEC-registered 1940 Act funds and complementary fund of hedge fund products.
Man Group did not respond to calls seeking comment.
Neither party disclosed financial or legal advisers for the transaction.