Huntington Beach-based bond fund manager Allegiance Investment Management LLC is looking to go after global investments as part of Australia’s Macquarie Group Ltd.
Macquarie, an investment bank, fund manager and retail bank operator, bought a 65% stake in Allegiance earlier this month for undisclosed terms.
Allegiance, which has $4.5 billion in assets under management for pension funds, endowments, foundations and corporations, is set to be renamed Macquarie Allegiance Capital LLC.
The deal is expected to close in the second quarter, about a year after talks began.
The acquisition “opens opportunities outside the U.S. in areas such as Australia, Asia and Europe that were beyond the reach of our existing capabilities,” said Mark Torline, Allegiance’s chief executive.
A favorable exchange rate sweetened the deal for Macquarie, as it has for other foreign buyers of local companies (see Mergers and Acquisitions special report, page 29).
Executives and employees at Allegiance are selling half of their 61% stake in the company. Private equity firm Rosemont Partners LLC of Pennsylvania is selling its minority stake to Macquarie.
Allegiance invests in government and corporate bonds as well as asset-backed securities, such as those tied to mortgages.
In most markets, Allegiance would be the bond fund king. But in Orange County, it’s in the long shadow of Newport Beach-based Pacific Investment Management Co. Pimco is the best-known bond fund manager with nearly $750 billion under management.
Now Allegiance is becoming part of a big global player in Macquarie, which has about $200 billion in assets under management and 11,000 workers in Europe, the Americas, the Middle East and Africa.
Allegiance is joining Macquarie’s funds management group with about $55 billion in assets.
Macquarie runs its investment operations from London, Hong Kong, San Diego and Sydney. The company has an office in Irvine.
As part of Macquarie, Alliegance is looking to expand into investments in commodities, currencies, private equity, global real estate and stocks, Torline said.
For Macquarie, buying Allegiance gives its institutional investors and retail clients more options, said Ben Bruck, head of Macquarie’s funds management group.
About 55% of Macquarie’s income comes from business outside Aus-tralia, according to the company.
Before the deal, Allegiance only traded bonds issued in the U.S., putting it at a disadvantage to Pimco and New York’s BlackRock Inc.
“When I came into the business and up until a few years ago, global awareness wasn’t important,” Torline said.
Access to Macquarie’s research and management of investment risk are benefits, he said.
Similar philosophies were a critical part in working out the deal, according to Torline.
Allegiance has averaged two to three buyout offers a year but only considered selling if the price was right, Torline said.
Torline and Allegiance’s chief investment officer, Bill Mawhorter, are staying on in the same roles.
No layoffs have been planned.
Macquarie’s Louise Walker, a division director with the company, is moving from Australia to Huntington Beach to be Allegiance’s head of product management and marketing.
Macquarie expects the bond market to remain volatile. Last month, a unit of the company sold some U.S. debt investments at a loss after violating agreements with lenders.
Allegiance started in 1988 and has grown steadily ever since, Torline said.
It works with about 200 institutional clients, including Sweden’s Volvo AB and France’s Soci & #233;t & #233; Bic, maker of Bic pens. The company tries to beat the majority of bond fund returns as measured by indexes such as the Lehman Aggregate Bond Index.
Like Pimco, Allegiance uses a “total return” strategy,earning interest on investments as well as taking advantage of price swings in bonds by buying low and selling high.
Allegiance turns over its investments 200% to 400% a year, buying and selling bonds to try and gain an edge over the Lehman index.
The Lehman index averages the performance of government, corporate and asset-backed bonds.
The credit crunch presents an opportunity to beat the index, according to Torline.
“There are a number of securities currently in the marketplace that are being priced well below their expected value and when the panic begins to subside they will represent exceptional investment opportunities,” he said.
