(Bloomberg) -- Madison Dearborn Partners LLC has salvaged its bet on Nuveen Investments Inc. almost seven years after the disastrously timed buyout and two years after a star manager’s exit derailed plans for an initial public offering.

Madison Dearborn is set to walk away from the $6.25 billion sale announced yesterday to TIAA-CREF with $1.1 billion, about the same amount it paid to acquire a majority stake in Nuveen, according to a person familiar with the transaction who asked not to be named because the information is private. The Chicago- based private-equity firm paid $5.75 billion in what was then the largest acquisition of a U.S. money manager.

“It wasn’t a shameful moment in history for Madison Dearborn, but it was not a triumphant one, either,” Don Putnam, founder of PL Advisors, a New York- and Geneva-based firm that advises money managers on mergers and acquisitions, said in an interview.

Madison Dearborn led the acquisition of Nuveen in November 2007 near the height of the buyout boom and less than one year before the collapse of Lehman Brothers Holdings Inc. triggered turmoil in the stock and bond markets. The firm and its clients invested $1.27 billion for about a 46%stake, according to regulatory filings. Nuveen, the largest U.S. manager of closed-end funds and well known for its offerings in municipal debt, then oversaw about $170 billion.

Madison Dearborn was confident about the transaction at the time because several big broker-dealer companies, the same firms that hold a grip on mutual-fund sales in the U.S., were partners in the acquisition, said the person.

Kate Schneiderman, a Madison Dearborn spokeswoman at Abernathy MacGregor Group Inc., declined to comment on the investment.

Symphony CLO

Madison Dearborn tapped $975 million from its fifth buyout fund for the Nuveen stake, the person said. The amount invested included $34 million for a controlling stake in a pool called Symphony CLO V, a collateralized loan obligation that Nuveen raised the same year, according to the person. The second- largest sponsor was Merrill Lynch’s private-equity unit, which took about a 33% stake. Bank of America Corp. bought Merrill Lynch in 2009.

The total purchase price of $5.75 billion valued Nuveen at about 14 times its adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, just as the U.S. mortgage market was showing signs of strain.

PL Advisors’ Putnam said private equity competition during that era drove the buyers to pay too much. The high price proved especially dangerous because of the deal’s structure, which saddled Nuveen with debt, he said.

‘Near Death’

“It brought them to near death two or three times,” Putnam said.

Madison Dearborn’s vision for the transaction unraveled within a year as the mortgage bubble burst, triggering a financial crisis that cut the S&P 500 Index of U.S. stocks by almost 40% in the six months following the September 2008 bankruptcy of Lehman Brothers.

In February 2011, the Madison Dearborn fund paid an additional $125 million for a majority of Bank of America’s stake, the person said. The firm’s clients put in more, raising Madison Dearborn’s total stake to about 60%.

Madison Dearborn rode out the crisis pumping in more money to help Nuveen grow. In November 2008, Nuveen purchased Winslow Capital Management, a manager focused on growth stocks. It didn’t reveal the terms. It raised $280 million in debt in November 2011 to purchase a 60% stake in Gresham Investment Management LLC.

“I would give most of the credit to the operating management, not the financiers,” Putnam said.

Assets Recover

Assets at Nuveen recovered and grew to above $225 billion as of March 2012 as Madison Dearborn planned an IPO. Before that could happen, the firm took another blow when David Iben, lead manager and chief investment officer at one of Nuveen’s most profitable units, Tradewinds, was hired away by hedge-fund manager Jeffrey Vinik.

Nuveen saw $14.2 billion in net withdrawals in 2012, driven largely by Iben’s departure, according to the firm’s annual report. The reaction caused Madison Dearborn to shelve plans for an IPO, the person said.

TIAA-CREF, known best as a manager of retirement accounts for college professors and researchers, then entered the picture, pushing aggressively for a deal late last year and into this year, the person said.

With Nuveen’s $221 billion in assets, TIAA-CREF will oversee almost $800 billion and vault into the top 20 of U.S. mutual fund providers. Madison Dearborn expects to complete the sale by the end of 2014.

Potential Earnout

While Madison Dearborn is selling its stake in Nuveen for several hundred million dollars less than it paid, it will break even on the investment, the person said. That’s because it will reap an additional $600 million from Nuveen’s cash reserves and from its share of profits on various products Nuveen started over the years. It will also turn a profit from Symphony CLO V.

The deal also contains a modest three-year earnout that could make the investment profitable, the person said. An earnout is a provision by which the seller can collect more depending on the performance of the company acquired.

The $6.25 billion price tag of the sale, including $4.56 billion in debt, values Nuveen at 13 times adjusted EBITDA.

Madison Dearborn has raised six private-equity funds with aggregate capital of more than $18 billion since its inception in 1992. It has completed investments in about 125 companies, according to the firm’s website.

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