Did Uncle Sam get his pocket picked in the sale of AIG (NYSE:AIG) Asset Management to Hong Kong billionaire Richard Li’s Pacific Century Group? It would appear as if Uncle Sam was ‘picked off’ . . . or is there something else going on contingent to this transaction? Why should the American taxpayer care about this sale of AIG Asset Management to a Chinese entity? For the very simple reason that you, me and every other American taxpayer own 80% of AIG. Are the power brokers in Washington or the people they have put in charge at AIG protecting our interests? On this transaction, further questions need to be asked.
AIG Asset Management has approximately $89 billion in assets under management. Very credible sources whom I respect have shared with me that the assets consist of the following:
- $50 billion in equities which generate fees of 50 basis points per year or a total of $250 million
- $15 billion in private equity which generate fees of 2% per year and 20% of profits for a minimum of $300 million
- $5-$10 billion in fund of funds which generate fees of 1% per year and 10% of profits for a minimum of $50 million
- $15 billion of fixed income (bonds) which generate fees of approximately 65 basis points per year or a total of $97.5 million
Total it up and AIG generated a top line revenue of at least $700 million. My source indicates the top line was more likely between $800 million and $1 billion.
What did Hong Kong based Pacific Century pay for this cash flow? A mere $300 million with contingency fees based upon performance which may take the price up to $500 million. Thus, Pacific Century paid at most .7 times cash flow.
What does that price mean on a relative basis? Again in an attempt to be conservative, asset management businesses have traded for between 8-12 times cash flow. Even if I cut that estimate in half and said that AIG is a distressed seller and the premium for asset management business units has come down, 5 times cash flow would equate to a bare minimum price for this business of $3.5 billion.
What is going on? Why did AIG Asset Management trade so cheaply? Is this some form of payback that Uncle Sam is making to China? Is there a process in place to keep these sales honest? Where does one receive information and transparency on the sale of AIG’s assets?
Many people on Wall Street are scratching their heads on this transaction.
Recently appointed AIG CEO Robert Benmosche indicated that he was going to be patient and get fair value for AIG’s business units. If this transaction is any indication of Benmosche’s patience and measure of fair value, then he is clearly not the guy for the job.
In my opinion, though, the individual who needs to provide some answers here is Treasury Secretary Geithner. Recall that AIG was saved via TARP funds. Who oversees the TARP? Secretary Geithner. With sales such as this one, the American taxpayer will never get repaid for bailing out AIG.
Something smells here.