Activist hedge fund takes stake in struggling Deutsche Bank
Douglas Braunstein’s Hudson Executive Capital backing beleaguered bank’s management
A New York-based activist hedge fund has taken a stake in Deutsche Bank AG, betting the German lender’s new chief executive can revive its sagging profits by pursuing a turnaround strategy investors so far have found unconvincing.
Hudson Executive Capital LP, led by former JPMorgan Chase & Co. finance chief Douglas Braunstein, said it has built about a 3.1% stake in Deutsche Bank common shares.
The investment, Hudson’s biggest so far, was made in recent months as Deutsche Bank shares plumbed all-time lows. The roughly $620 million (U.S.) stake makes Hudson a top-five shareholder, and the first new one of size since the bank’s latest restructuring and CEO change in April.
In an interview, Mr. Braunstein called Deutsche Bank “misunderstood and undervalued,” a conclusion he drew during almost a year of talking to current and former executives and other finance contacts. His initial impression in late 2017 was that the management team at the time was “as dysfunctional as you could basically find.” Current executives seem unified in efforts to cut costs and boost revenues, he said.
Hudson believes the bank is taking the right steps under
Chief Executive Christian Sewing to bolster its traditional banking businesses serving retail customers in Germany, including wealthy asset-management clients, and European companies seeking deal advice, lending and cash management.
“Doug Braunstein and Hudson Executive come with deep backgrounds investing in financial services companies,” Mr. Sewing said Thursday in a statement. “We appreciate Hudson Executive’s confidence in our ability to execute on our strategic objectives.”
Shares in Deutsche Bank rose about 2% on the news.
Deutsche Bank’s global-transaction-banking unit, which is Douglas Braunstein, founder of Hudson Executive Capital and former JPMorgan Chase & Co. finance chief, called Deutsche Bank “misunderstood and undervalued.”
part of its investment bank and houses its trade-finance and cash-management businesses, has brighter prospects than a spate of dismal results suggests, in Mr. Braunstein’s view. The bank needs to better link those customers with its big fixedincome business, he said, something the lender is focused on.
He called transaction banking a “crown-jewel asset” that helps provide affordable funding, easing one of the lender’s big problems—its higher-than-average funding costs.
Mr. Sewing, a career Deutsche Bank employee who became CEO when the supervisory board fired his predecessor, has said he is refocusing on the lender’s roots serving European companies and making its German retail banking more efficient. He wants it to be less dependent on trading
businesses that historically have driven profits but have become more volatile.
Mr. Braunstein praised Mr. Sewing. “We would not have made the investment but for the fact that we think he’s the right guy for the job,” Mr. Braunstein said.
He added that a move by private-equity firm Cerberus Capital Management LP and its president, Matt Zames, to formally advise Deutsche Bank on costcutting and operational challenges was “a very significant positive.” Cerberus in November 2017 disclosed a roughly 3% position in the bank. Earlier this year, in an unorthodox move, Cerberus also became a paid adviser to Deutsche Bank. Messrs. Braunstein and Zames had worked together closely in senior JPMorgan roles. Mr. Zames was JPMorgan’s
chief operating officer before leaving the bank last year.
Deutsche Bank has seen its market value plummet to about $20 billion, roughly a third of its value before the financial crisis, as it paid billions in legal settlements, suffered technology and compliance shortfalls and saw business move to stronger U.S. banks. Its shares have declined nearly 46% this year and hit record lows in October after the bank reported a sharp decline in third-quarter earnings and tapered its full-year revenue forecast. In recent months it has cut thousands of jobs, failed a U.S. Federal Reserve stress test and continued to lose senior executives.
Deutsche executives see Mr. Braunstein as supportive even as he makes clear the firm must turn around underperforming businesses, a person close to the bank said.
Asked about persistent speculation that Deutsche Bank could merge with German rival Commerzbank AG, Mr. Braunstein said Deutsche Bank has enough “self-help” to focus on without pursuing a merger. He said he isn’t invested in Commerzbank.
Hudson Executive, launched in 2015, bills itself as a constructive activist shareholder. Unlike traditional activists, it eschews public letters and proxy contests, instead preferring to work alongside management with the help of an advisory team of chief executives. Included in Hudson’s roughly $1.4 billion in assets under management are two single-company wagers. These include the position in Deutsche Bank and one in Cardtronics PLC, an ATM company whose board Mr. Braunstein joined this year.
Activist investors have at times shied away from banks, whose businesses are subject to heavy regulation and broad market shifts that can make it hard to predict outcomes. But as banks emerged from the financial crisis as less risky institutions, they became more attractive.
ValueAct Capital Partners LP, another activist that considers itself friendly, revealed a 0.7% stake in Citigroup Inc. in May without calling for any significant changes. It told investors at the time that it believes the bank’s strength as a provider of cash management and other corporate banking services will lead to growth in the postcrisis era.
A significant portion of Hudson’s capital for the Deutsche Bank investment comes from EnTrustPermal, Gregg Hymowitz’s fund-of-hedge-funds firm known for backing some of the activists’ largest bets. Mr. Hymowitz said Deutsche Bank’s credibility has been so dented that investor expectations are artificially low.
“I don’t need JPMorgan quality,” he said. “What we really need is for the world to believe this bank is mediocre.”