Opalesque Industry Update – While most U.S. banks are shunning hedge funds with the enactment of the Dodd-Frank Act, Credit Suisse Group AG is doing the opposite with the acquisition of a $425m minority stake with New York-based global hedge fund York Capital Management.|
Under the terms of the deal, York will continue to be run independently by founder and CEO Jamie Dinan, and CIO Dan Schwartz. The two firms also agreed to provide for earn-out payments based on five-year financial performance by York and a retention arrangement for the CEO, CIO and other senior York principals.
In a statement, Credit Suisse said the deal with York is a non-controlling interest and not an investment in York’s fund. It pointed out that this is consistent with the rules under the Dodd-Frank Act which prohibits banks to invest its own money in hedge funds.
President Barack Obama signed the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act in July. Under the new law, banks are limited to invest in proprietary trading to no more than 3% of their Tier 1 capital and the law limits the aggregate investment in any and all hedge funds and private equity to no more than 3% of its Tier 1 capital. Banks are given between four and seven years to comply with said provision.
Credit Suisse’s Asset Management Division CIO Rob Shafir commented on the deal, “This relationship with York is an important next step in executing our growth strategy in Asset Management and extending Credit Suisse's leadership in global alternative investments. Our clients will have access to a top-tier suite of products, independently managed by York, and benefit from using York’s proven approach that has delivered superior returns to investors across market cycles. We look forward to working with Jamie and his experienced team.”
News of the deal sent shares of Credit Suisse up by 34 cents to $46.93 during Tuesday’s trading, it was reported.
Shafir explained that Credit Suisse’s latest move is in line with the bank’s move towards alternative offerings, including hedge funds. He said this reflects a trend in the industry to “morph and institutionalize” in the face of the financial reforms.
"Until the rules were written and we had clarity about what could be done around the sponsorship of hedge funds, we clearly did not do a deal," Shafir told Wall Street Journal.
The Journal added that the agreement could be profitable for York as the $425m payment made by Credit Suisse could more than double over time as the bank would sweeten payments depending on York’s performance.
Founded in 1991, York Capital Management has offices in New York, Washington, DC, London and Hong Kong. The firm manages approximately $14bn on behalf of institutions, endowments, foundations, fund of funds, wealthy individuals and their families.
The firm returned roughly 45% in its flagship multi-strategy fund in 2009, beating industry averages. The fund's average annual return is a better-than-average 15%, said Wall Street Journal. York Capital Management was apparently already in talks with Credit Suisse Group about the bank's interest in buying a minority stake back in March.
A source told China Hedge Weekly in June that China Investment Corporation, the nation's $200bn sovereign wealth fund, may invest in hedge funds managed by York Capital Management. No news of such investments since then.