Deutsche Bank Expected to Sell Arrowgrass Stake -- Update

By Juliet Chung 

Deutsche Bank AG is in advanced talks to sell its minority stake in London-based hedge-fund firm Arrowgrass Capital Partners LLP to Foundation Capital Partners, according to people familiar with the matter.

Foundation, a private-equity firm, is expected to pay between $100 million and $200 million for more than a 20% stake in Arrowgrass, which would include Deutsche Bank's 17.5% share, plus additional equity, one of the people said.

The deal could wrap up as soon as this month and would value Arrowgrass, which manages about $5 billion as a multistrategy fund, at more than $500 million.

In return, Foundation would share in the stream of management and performance fees brought in by Arrowgrass, which spun out of Deutsche during the financial crisis.

The deal comes amid a rise in deal-making for minority stakes in hedge funds as several firms, including Blackstone Group LP and Neuberger Berman's Dyal Capital Partners, have raised billions in private-equity funds to buy such stakes. Foundation, based in Greenwich, Conn., is headed by former Citigroup and Deutsche executive Dean Barr.

Basel III regulations that impose tougher rules on how big banks manage risks and stockpile capital are a factor encouraging Deutsche to sell its stake, one of the people said.

Amid tougher regulation on both sides of the Atlantic, big banks broadly are paring back on expensive or less-profitable businesses; Deutsche in November said it was sharply reducing its trading in credit-default swaps, which are derivatives that function like insurance for bonds and loans.

Arrowgrass, run by Nicholas Niell and Henry Kenner, has grown from about $1.8 billion in 2009 to about $5 billion this year. Its average annualized return has been about 7% a year since 2008, people familiar with the firm said.

It is flat this year through October, one of the people said, compared with a 1.2% loss for the period by multistrategy funds on average, according to data-tracker HFR.

An Arrowgrass stake would be the first deal for Foundation, a lesser-known private-equity firm founded in late 2010 to buy such minority stakes.

Foundation sees the deal as a bet on Arrowgrass's growth, said a person familiar with the matter.

Write to Juliet Chung at [e-mail]

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