Earlier this week, Wells Fargo (NYSE:WFC) announced that it has acquired a 35% stake in The Rock Creek Group – one of the largest fund of hedge funds in the U.S. ((Wells Fargo Asset Management Makes a Strategic Investment in the Rock Creek Group, Wells Fargo Press Releases, Dec 18 2012)) The move is in line with Wells Fargo’s decision to double its asset management business over the next seven years, both organically by expanding internationally and inorganically by investing in alternative investment funds (see Wells Fargo Set To Double Its Asset Management Business). As of now, there is expected to be no change in Rock Creek at any level as a result of the deal. Wells Fargo does add that it may increase its stake in the company over the coming years.
We maintain a $38 price estimate for Wells Fargo’s stock, which is about 10% above the current market price.
Since 2008, when Wells Fargo acquired Wachovia and along with it a reputed asset management business, the bank has made a series of investments to implement a multi-boutique business model for the business. Most notably, the bank acquired Galliard Capital Management (stable value manager), Golden Capital Management (quantitative manager) and EverKey Global Partners (global equity manager) over the years to be able to address the varied investment requirements of its clients (see Wells Fargo Expands Asset Mgmt Offering, 20% of Stock Value).
The strategic investment in Rock Creek expands Wells Fargo’s hedge fund offerings to new and existing clients as the deal will help the bank capitalize on Rock Creek’s expertise as a fund of hedge funds, backed by its proprietary analytics platform, Rock Creek Solutions. Rock Creed manages about $7 billion in assets entirely invested by institutional clients. This compare to around $450 billion in retail & institutional investor asset managed by Wells Fargo Asset Management (WFAM).
While the deal for a minority stake in Rock Creek will not accrue to WFAM’s asset base as of now, we believe that Wells Fargo will raise its stake to a majority over coming years, reporting Rock Creek’s revenues along with its own.