Can First Eagle's New Owners and CEO Balance Stability and Growth?

The investment boutique that advises the First Eagle funds and runs $100 billion total has seen a great deal of change lately. While the firm still offers some solid funds, it currently earns a Parent Rating of Neutral. Here are some of the salient points that helped us arrive at that rating.

In mid-2015, First Eagle Investment Management announced that the majority of the firm, which manages six funds (a seventh is subadvised), would be sold to private equity firms Blackstone and Corsair Capital. While roughly one fourth of the firm had been owned by another private equity firm, TA Associates, since 2007, this is the first time since 1999 that a majority of the funds' advisor has not been owned by the Arnhold family. That family was the longtime owner of investment broker Arnhold and S. Bleichroder, which purchased the funds and their advisor from French bank Societe Generale in 1999 and then changed its name to First Eagle. After the recent sale of First Eagle closed, Blackstone and Corsair now own 58% of the firm between them, while the family owns about 25% and firm employees own the remaining 17%.

On the heels of the sale, CEO Bridget Macaskill stepped down after six years at the helm of First Eagle Investment Management (she's now a senior advisor) and Mehdi Mahmud, formerly CEO of Jennison Associates, took over. It's also worth noting that in late 2015, First Eagle announced that it would be paying a nearly $40 million fine to settle charges that the firm improperly used fund assets for distribution and marketing expenses. At the time of that announcement, the firm had already hired a new chief compliance officer, who increased outside testing of the firm's compliance procedures.

The Way Forward These changes create some uncertainty, but there could be benefits for fundholders. True, private equity funds tend to have fairly short time horizons and want to see growth in order to earn a return on their investment. In this case, the vehicle used by Blackstone and Corsair for the acquisition is expected to have a long holding period (12-14 years), and they say they don't need a lot of growth from the firm in order to meet their return expectations.

That said, there are still areas of potential concern. Growth may be hard to come by within the existing fund lineup. It's dominated by two large funds: the $50 billion

It's clear that CEO Mahmud was hired in part to expand the fund lineup, as he did at Jennison. He says he may expand First Eagle's capabilities (and then launch more funds) by lifting out a team from another firm--as the firm did when it acquired a high-yield team in 2011--acquiring a small firm, or hiring a new manager and building around them. But Mahmud knows he'd have to guard against disrupting the firm's culture. During our recent visit to First Eagle's offices, he was impressively straightforward and appears to take a thoughtful approach to running the firm.

However, it was disappointing that neither he nor investment team leader Matthew McLennan have yet established a capacity figure for First Eagle Global, though Mahmud has thought about capacity issues. The team runs a total of $60 billion in the strategy and thus has a difficult time taking significant positions in the small- and mid-cap stocks that were at times a staple of the portfolio when longtime skipper Jean-Marie Eveillard (now a senior advisor to the firm) ran the fund. Compare the fund's current bulk to that of

The uncertainty created by these recent changes, coupled with the firm's regulatory issue, led to the Neutral Parent rating, but Morningstar is somewhat encouraged by its initial impressions of ownership and management. We'll keep a close eye on the stability of the investment team, as well as how the firm manages capacity at First Eagle Global and develops its fund lineup.