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June 01, 2016  

Arrowgrass Courts Pension for Deutsche Deal

Arrowgrass Capital is orchestrating a deal that would finally allow Deutsche Bank to sell its ownership interest in the $5.8 billion hedge fund operation.

Sources said the London firm is in talks with Wisconsin Investment about a deal in which the $98 billion pension system would acquire Deutsche’s 17.5% stake in Arrowgrass. But the negotiations are ongoing, and the contours of the deal remain fluid. It’s even possible that Arrowgrass’ principals buy out Deutsche’s stake with backing from the pension.

A source pegged Arrowgrass’ valuation at about $400 million, based on estimated management- and performance-fee revenue assuming a 7% annualized return. That would value Deutsche’s stake at about $70 million.

Arrowgrass formed in 2008 when a convertible-bond team at Deutsche spun off with the bank’s backing. For a few years now, both Arrowgrass and Deutsche have looked for ways for the bank to cash out its equity stake in the fund operator. Indeed, in early 2015, the parties reached a deal with Foundation Capital, a Greenwich, Conn., shop led by former Citigroup executive Dean Barr. The transaction soon unraveled, however, amid financial and legal difficulties that later forced Barr to shutter his business.

The deal now in the works would add Wisconsin Investment to a small list of public pensions that have acquired equity stakes in hedge fund-management firms. For example, Ontario Municipal Employees and Texas Teachers both hold minority interests in Bridgewater Associates.

The Wisconsin system, led by chief investment officer David Villa, is well acquainted with Arrowgrass by virtue of investments it has made in the manager’s funds — including a recently launched merger-arbitrage vehicle that had more than $600 million as of April 1. It’s also familiar with the business of buying general-partnership stakes as a client of Dyal Capital, a Neuberger Berman unit that runs private equity vehicles targeting hedge fund businesses.

Wisconsin Investment has been investing in hedge funds since 2011. As of Feb. 29, it had $3.7 billion in its “alpha pool,” including $3.3 billion in hedge funds and more in alternative mutual funds and “tactical-alpha” products. It also has another $838 million in risk-parity strategies run by AQR Capital and Bridgewater. Cliffwater advises the pension on its hedge fund investments.

Arrowgrass bills itself as a multi-strategy fund manager. Its $5 billion Arrowgrass Master Fund was down 2.2% year-to-date through the end of March. It gained 6.1% last year and has a 6.8% annualized return.

Arrowgrass is led by chief investment officer Nick Niell and chief executive Henry Kenner.