The New York Times DealBook – Allied World Assurance Buys Hedge Fund Stake
By PETER LATTMAN, October 9, 2012

Allied World Assurance, a publicly traded insurance company, has acquired a substantial minority interest in MatlinPatterson, the private equity and hedge fund firm, according to people briefed on the deal.

As part of the transaction, Allied World has also agreed to invest $500 million in MatlinPatterson’s funds, these people said.

Allied World’s investment is the latest example of institutional investors like insurers or pension funds taking an ownership stake in a private investment firm, while also committing substantial money to the firm’s funds. Last month, for instance, Florida’s state pension fund acquired a minority interest in the private equity firm Providence Equity Partners. In 2011, the private equity firm TPG agreed to sell a small piece of itself to two sovereign wealth funds.

These deals benefit the institutional investor in several ways. They allow pensions and insurers searching for returns in difficult markets to tap the investment expertise of a money manager. Also, the investor typically receives discounts on the funds in which they invest, as is the case with Allied World in its transaction with MatlinPatterson.

The New York-based MatlinPatterson is a decade-old firm run by David Matlin and Mark Patterson, former executives at Credit Suisse First Boston. The firm, with about $5.5 billion in assets under management, is best known for its investments in distressed assets. In recent years it has pushed into a variety of other strategies under the leadership of David Cody, the chief executive of MatlinPatterson’s hedge fund unit.

MatlinPatterson’s recent successes include the sale of its portfolio company, XLHealth, to the UnitedHealth Group last November for about $2.4 billion; and an investment in the homebuilder Standard Pacific. Yet the firm has struggled with its $1 billion stake in the Michigan bank Flagstar Bancorp.

Allied World, a property and casualty insurer with headquarters in Switzerland, was formed in 2001 with financial backing from the American International Group, Goldman Sachs and other investors. The company, run by Scott Carmilani, made headlines last year as one of the potential buyers in a bidding war lasting months for Transatlantic Holdings, the New York reinsurance company. It has an investment portfolio of more than $8 billion. Insurers like Allied World are active players in the financial markets as they build up cash on their balance sheet through the collection of premiums and need somewhere to invest it.

MatlinPatterson and Allied World have longstanding ties. Mr. Patterson of MatlinPatterson served on Allied World’s board until earlier this year.