Asset manager DWS has formed a joint venture with a division of Northwestern Mutual Life Insurance Co. to invest in private markets, seeking to scale up in an area popular with large asset allocators like pensions.
The partnership will help DWS — which spun out from Deutsche Bank through an initial public offering in 2018 — move into direct lending and expand its private equity business, said Mark McDonald, global head of private equity at the asset manager, in a phone interview. The firm’s roughly €100 billion ($113 billion) of alternative assets are mostly in infrastructure and real estate, he said, with private equity now representing only a small portion of around $2 billion.
Its new partner, Northwestern Mutual Capital, provides debt financing and co-invests equity in new deals done by buyout firms — capabilities DWS has not had, according to McDonald. DWS, which has a global base of institutional investor clients, will help raise funds targeting such strategies under the new partnership, he said.
While the asset manager has relationships with investors such as pensions and endowments, Milwaukee-based Northwestern Mutual has mainly invested from the balance sheet of its life insurance parent, according to Kumber Husain, DWS’s head of Americas private equity.
“They are looking to expand their capital base,” Husain said by phone. The joint venture will also help DWS “scale up” he said, as “we’re really trying to be a solutions provider to private equity sponsors.”
McDonald joined DWS in London from Credit Suisse Group in late 2017, shortly before it became an independently-listed asset manager that remains majority owned by Deutsche. Before the IPO, McDonald said he got call to come and build a new private equity business for the asset manager. His roughly two decades of sector experience include leading secondary advisory at Credit Suisse and earlier roles at Keyhaven Capital Partners, Pomona Capital, 3i Group, and Barclays.
Under McDonald, DWS’s private equity business has focused on “midlife” deals in Europe and the U.S., investing in private equity-owned businesses two or three years after their purchase by buyout firm. Private equity owners turn to DWS to help finance the expansion of their portfolio companies, he explained.
“They have a luxury problem,” McDonald said, in that opportunity for growth of a company may be bigger than the private equity owner expected. He said DWS can step in to help a buyout fund prevented from investing more capital in a company due to concentration limits set under their partnership agreements with investors.
The strategy complements Northwestern Mutual Capital’s business of co-investing in new private equity deals and providing junior debt financing, according to McDonald. Husain said he had developed a “close relationship” with Northwestern Mutual in his previous job as portfolio manager in Morgan Stanley’s secondaries business.
DWS’s clients have been searching for yield in private markets because it’s hard to meet their return targets with stocks and bonds, according to Husain, who is based in New York. He said he’s seen some investors increase their allocations to private markets from five percent to 15 percent.
“That’s why DWS and other asset managers are looking to grow here,” he said. “It’s really a reflection of what the investors are doing.”