J.P. Morgan Partners has sent out books to 25 potential bidders for its loan asset management arm, Octagon Credit Investors, and a short list of buyers is emerging. A source familiar with the situation cited D.L. Babson & Co., Stanfield Capital Partners and Highland Capital Partners as the likely lead candidates to buy the operation. He added that a management buyout is possible, though this is less likely than a sale, which he predicted would happen later this year. James Ferguson, a senior portfolio manager who founded Octagon in 1994, did not return calls for comment. Officials at the potential buyers either declined comment or did not return calls.
LMW first reported in August that Octagon, which has over $1.75 billion in assets under management, could be for sale (LMW, 8/31). Bankers said the reasons were twofold. J.P. Morgan has made it clear it is looking at ways to reduce its private equity commitments. Also FIN 46, a Financial Accounting Standards Board measure that calls for the consolidation of special purpose vehicles on the balance sheet of the firm or bank taking on most of the vehicle's risk, unnerved J.P. Morgan.
Though FASB is altering the FIN 46 proposal so that managers may not automatically have to consolidate, one source at a major CDO asset management firm said many public entities are still wary of consolidation. Last year, Babson acquired the management rights and a significant equity stake in Seaboard CLO, managed by Orix Capital Markets, due to consolidation concerns from the seller.
Other factors have led to increased acquisition activity, as demonstrated by Allied Capital's purchase of Callidus Capital Management (11/23) and Barclays Bank decision to sell the management of its Venture CDO 2002 and Venture II CDO 2002 loan funds to MJX Asset Management (9/21). "CDO/CLO management is somewhat capital intensive," said the source, who noted that to manage the business successfully requires all but a few managers to buy significant equity in their own deals.