EUROZONE: Deutsche’s detritus

It turns out, Deutsche Bank and Guggenheim did manage to do a deal together after all. Of course, that was 15 years ago!

In 1997, the German bank agreed to fund the Deutsche Guggenheim art museum in Berlin in conjunction with New York’s Guggenheim gallery, and so far they have put on something like 17 artwork exhibitions together. The 18th exhibit, incidentally, is due to begin this month featuring Mexico’s Gabriel Orozco, who is exhibiting  sculptures and photos of thousands of items of ‘detritus’ – basically, disintegrated matter and objects of rubbish.

In private equity real estate, Deutsche Bank’s dalliance with a different Guggenheim – Guggenheim Partners – also could be summed as detritus. Indeed, last month, the bank announced that talks between it and Guggenheim over the sale of its real estate and infrastructure platform, RREEF, were cancelled.

Given the uncertainty of the last six months, one would think that the lengthy merger talks have been hard for many at RREEF, which is believed to be quite collegiate. In addition, the senior management of RREEF has been involved in the strategic review of Deutsche’s asset management group since its announcement back in November.

Nevertheless, one feels a kind of sympathy for RREEF’s senior management. Here is what appears to be a well-managed, profit-making business and one of the great names in private equity real estate, which has publicly been hawked around to buyers with no resolution. Apparently, there was talk of senior management having a stake in the business under the Guggenheim umbrella if that deal had gone ahead. Now that the deal is off, everything feels like it has been a waste of time and a big distraction.

Indeed, the entire strategic review has taken more twists and turns than a roller coaster. A review of the asset management group was announced eight months ago, causing most to assume that the business would be sold. After a bidding process, it was announced that New York- and Chicago-based Guggenheim Partners was the chosen party for exclusive talks to buy the whole thing. Next, leaks about the deal began to suggest talks weren’t going that well and that the parties couldn’t agree to terms. That was followed by an announcement that the deal was concentrating solely on RREEF and not the other parts of the asset management business.

Finally, among more rumours that the deal was only 50:50, Deutsche said the deal was off and the ‘review’ concluded.

As all of this was going on, RREEF staff have done their best to carry on as usual. There have been some announcements about investment deals here and there, and it does not seem like there have been any mass departures. Indeed, PERE hears that head count within its asset management and wealth divisions was flat between the fourth quarter of 2011 and the first quarter of 2012, declining ever so slightly from 6,919 to 6,911 over that timeframe.

Nevertheless, one does come across notable departures in the US and Asia, some of which have been reported by PERE. A number of RREEF’s 600-strong staff are on contracts, and they have faced decision time as those contracts ended. Does one renew and commit to a longer future in the current atmosphere? Unsurprisingly, some have said no even before an official announcement was made that there was no deal with Guggenheim.

Though Deutsche Bank would argue it has not seen staff leave in droves, for the senior management at RREEF, there is the obvious challenge of retaining employees. One can imagine those involved in fundraising, for example, have faced the decision of whether to stay or go. Even if the deal with Guggenheim had gone ahead, there still would have been a period of uncertainly for one or two years as the integration process got underway. Investors, meanwhile, apparently have been telling RREEF staff that they intend to await a final outcome.

There are those that say Deutsche Bank has botched the job of dealing with RREEF as well as the wider asset management group.  Still, at least there is a chance of a fresh start, as chief executive Joseph Ackerman stepped down in May and the bank is now being run by co-CEOs Anshu Jain and Juergen Fitschen.

The ascension of Jain and Fitschen effectively has instigated a second broader review of the whole bank following the narrower review of the asset management division, which recently was joined with wealth management to create Deutsche Bank Asset & Wealth Management. The result of that broader review, however, will not be made public until September, leaving many stakeholders, both internal and external, in a state of limbo.

With the market having to wait another two months for total clarity, one could guess investors wouldn’t be keen to commit to a fund or strategy without knowing the final outcome. In the meantime, RREEF staff will need to stick to their tasks and muddle through. It is not the best outcome for a process that began so long ago.