The Swiss-based private bank has spent millions on a Milanese asset management subsidiary it has wanted to sell for years. But certain management egos have ostensibly kept a deal from happening.

It was last September when Zurich Insurance announced that it was interested in buying Julius Baer's Italian asset management subsidiary Kairos Partners, as both finews.ch (German only) and finewsticino.ch (Italian only) then reported, citing anonymous sources.

The Milan-based subsidiary has about 5 billion euros in assets under management and is reputedly worth between 40 and 50 million euros. At the time, Julius Baer declined to comment on the matter, while Zurich then delayed any decision until this autumn, further research indicates.

Unruly Management

Now that November has arrived, financial circles indicated that the acquisition talks seem to be hidden behind a «very thick fog» and it remains unclear whether any kind of deal is still possible, with all the involved parties continuing to refuse to comment.

As finewsticino.ch (Italian only) already reported, the difficulties are over the question of how the founding partners and top executives owning 30 percent of the manager should be compensated. They are chief executive Alberto Castelli, as well as Guido Brera, Rocco Bove, Massimo Trabattoni, and Caterina Giuggioli.

Mario Greco Increases Pressure

Ostensibly, it was just a small number of those in the list above who objected to the sale. Still, it has stopped the deal in its tracks given that Zurich is only interested in a full takeover. Moreover, it seems that current management is not interested in working for Kairos if it is taken over by the Swiss insurer.

Italian business newspaper «Il Sole 24 Ore» (Italian only) threw oil into the fire last week by reporting the talks had completely broken down even though not all those who are privy to the matter believe this is actually the case. Instead, they think that Zurich CEO Mario Greco only walked away from the table, if that is what he really did, to increase pressure, not least given that talks had become tense in recent days.

Possible Blowback

Apparently, the business' shareholders are asking for about 50 million euros, and the price difference between what they want and Zurich's offer is only about 10 million euros. The reason that a deal has not taken place is not about the money but because of the operational demands posed by current management.

If deal talks break off completely, it will not be the first time that Julius Baer failed to find a suitor for the business. In 2018 and 2019, the bank reviewed a number of suitors, including Mediobanca, Lombard Odier, Hellman & Friedman, JC Flowers, Apax Partners and Centerbridge. As we now know, none of them ended up buying the business.

A further interested party was reportedly Italian bank Banca Patrimoni Sella & C. which broke off acquisition talks earlier this year.

Unfortunate Chapter

The Kairos is an unfortunate chapter in Julius Baer's history. Plans to buy it were first announced in July 2012 by then-chief executive Boris Collardi. At the time, he was also negotiating the purchase of Merrill Lynch International and, given that, he agreed to take over Kairos in stages. It was then an asset manager with 4.5 billion euros in assets under management and more than 115 employees.

The first part of the transaction happened in November 2012. Julius Baer bought 20 percent of the business for an undisclosed price. Plans at the time envisioned creating an Italian private bank called Kairos Julius Baer SIM. Getting a bank license was also in the offing and CEO and founder Paolo Basilico would remain part of the business.

No IPO

At first, the business grew strongly, with assets under management rising to more than 8 billion euros by November 2015. Collardi wanted to buy another 60 percent stake in the business with the intention of floating it publicly with an initial public offering. The purchase happened in April 2016 and Julius Baer paid 276 million euros for the business. Markets were booming and the IPO plans remained on the table, although no firm date had been set.

In the fall of 2016, Collardi indicated that he had taken his foot off the pedal. Clients had become more passive even though Kairos continued to do well, with 2017 being a particularly bright spot. The leading managers received significantly higher bonuses although Collardi had likely missed the best time to bring the business to the market. In hindsight, that was probably because he was more preoccupied with his abrupt departure to Pictet.

Hot Potato

The responsibility for what had become a hot potato went to Collardi's successor Bernhard Hodler. He continued to toy with the idea of an IPO but he eventually came to the conclusion there were simply not enough investors around for the business. In other words, Julius Baer failed to exact a premium for the business through an IPO. By this point, the bank had invested around $500 million in what only be called a very expensive Italian adventure.

Founder Basilico and a few of his cohorts cashed in. He then left, being replaced in April 2018 by Fabio Bariletti. At the end of the same year, the business was worth at most 350 million euros, a price that was too low for Julius Baer given the 320 million in goodwill alone that it still had on the books for the business.

Difficult Times

In September 2019, Holder was replaced by Philipp Rickenbacher, and he became responsible for Kairos. Shortly after starting, he decided to bind the investment manager more closely to the Julius Baer group. As a result, a number of capable Kairos managers left. In October 2019, an entire hedge fund team departed, and at the end of the year, Julius Baer had to make a writedown for the business totaling 100 million euros.

Kairos had a difficult time during the pandemic. A few of the key investment managers still on board took over about 30 percent of its capital, with Julius Baer holding the remaining 70 percent. In October 2020, Baer announced another write-down of 170 million euros and two years, after that, another of 57 million euros.

No Money Earned

With that, it has become clear that Julius Baer has never managed to sustainably expand the asset manager's offering or even earn money with it. The client advisors who were supposed to distribute Kairos products to clients almost never did.

Julius Baer is now walking on eggshells in the country and it is simply not in a position to draw a line under what has become a rather poisoned Italian romance even though the business itself is operating in a dynamic market – one that other Swiss financial institutes are trying to get competitive footholds in.