Comment: Hedge fund managers land in the bargain bin
Man Group reaches through window of opportunity to buy 50% stake in Ore Hill
In business, as in sport, you have to take your chances in those rare moments when the odds shift in your favour. Man Group may claim it did just that last week when it bought a credit hedge fund manager. It may be acting too tentatively.
A window of opportunity appears to have opened for would-be acquirers of hedge fund managers. The credit squeeze has sent securities prices tumbling, while banks are reining in their lending, pushing managers towards a vicious circle where they have to sell their portfolios in a market that is accelerating downwards.
Many managers feel under pressure and would sell themselves cheaply.
UK-listed Man Group, with $75bn of assets under management, is the largest manager anywhere of hedge funds and funds of hedge funds. Last week it reached through this open window and agreed to buy a 50% stake in Ore Hill, a US credit hedge fund manager running $3bn of assets.
Man Group will pay with $195m in cash, $40m in ordinary Man Group shares, and a 50% stake in its subsidiary, Pemba Credit Advisers, a UK credit hedge fund manager with $3.7bn of assets that focuses on a different market from Ore Hill.
The transaction will create a global credit hedge fund manager jointly owned by Man Group and the founders of Ore Hill, Ben Nickoll and Fritz Wahl, who will run the business while Man Group focuses on selling its products.
Equity analysts and rival hedge fund managers last week agreed the deal was a good one, barring hidden pitfalls and accidents. The price ratios on the Ore Hill deal were a little lower than those of earlier deals, according to equity analysts.
Man Group has good form as a distributor, having helped UK hedge fund manager BlueCrest treble its assets under management in the four years since taking a 25% stake in it, for £100m in 2003. It can earn money as the co-owner of the Ore Hill Group and from distribution fees.
But is the transaction ambitious enough? Four years ago, JP Morgan spent $1bn buying Highbridge Capital Management, a deal so risky it was scorned at the time but which succeeded so well the bank became the largest hedge fund manager in the US. In 2005, Legg Mason spent almost $1bn buying fund of hedge funds manager Permal, which has thrived.
In 2006, Morgan Stanley made repeated purchases of strategic stakes in hedge fund managers, culminating in the acquisition of FrontPoint Partners, for a combined bill of about $1bn, in a series of deals seen as successful. Citigroup last year bought Old Lane for an estimated $800m and went on to make one of the hedge fund manager's co-founders, Vikram Pandit, its chief executive.
None of these acquirers had Man Group's expertise in hedge funds or distribution, but they took more of a risk. They also made their purchases when the window of opportunity was less inviting, when hedge funds were taking in assets hand over fist. So why is Man Group apparently being so cautious?
Three possible answers present themselves. The first possibility is that Man Group has a number of other acquisitions lined up. Equity analysts at Dresdner Kleinwort said last week the Ore Hill transaction was unlikely to be Man Group's last.
Hedge fund managers are known as hard negotiators, especially when it comes to their own business, which most of them established because they wanted to be independent. Negotiating the sensitive issues of managerial control and autonomy within a merged organisation takes time.
Second, perhaps the window of opportunity is not as inviting close up as it looks from a distance. The dust stirred by the crisis in the credit market is far from settled.
Man Group is almost certainly right when it argues, as it did last week, that there are many opportunities for investing in credit, but there is uncertainty about telling the good from the bad.
Many managers that were once thought to be good have now done so badly that rivals say they are not sure who to rely on any more. For every management firm with which it might be worth getting into serious negotiations, there are 19 others that should be avoided, according to the chief executive of a UK hedge fund management group.
The third possibility is the departure of Stanley Fink as chief executive 18 months ago, replaced by Peter Clarke, the group's former finance director. Hedge fund managers think Man Group might have made a more significant acquisition if Fink had been in the hot seat.
Clarke was a former mergers and acquisitions banker, who learnt his trade at Morgan Grenfell, and played a leading role in most of the deals that occurred when Fink was chief executive. Nevertheless, the difference between advising and deciding is immense and there is a possibility that Clarke is erring on the side of caution.
Sportsmen have to take their chances when they come. In some games, the players have to make the most of those periods when the odds temporarily move in their favour, because the rest of the time the odds will be against them and they will be losing. The same can be true in business.
In the hedge fund business, the credit squeeze has left many managers looking carefully at the prime broking contracts they agreed with their bankers, and some are seeking to restructure their funds so their investors cannot take their money away so quickly.
Seldom has a strong parent appeared so attractive to hedge fund managers, especially those focusing on credit, as a way to ride through the storm. And with the banks mostly knocked out by the credit crisis, there are only a handful of credible buyers, among them US hedge fund managers Och-Ziff and Citadel, and UK manager GLG Partners.
Windows of opportunity always close sooner or later. Man Group has done well to move, but it may come to regret not acting even more boldly in the spring of this year.
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