The alternative investment industry, including both hedge funds and private equity, is undergoing a shift in ownership structure as managers seek to create permanent capital through stock
The alternative investment industry, including both hedge funds and private equity, is undergoing a shift in ownership structure as managers seek to create permanent capital through stock market listings, while establishing the path to an exit or at least reinforcing the permanence of their business through a public offering or private sale of a stake in the management company, according to Ernst & Young partner Julian Young.
Young was speaking at a seminar on operational excellence in the hedge fund industry at London’s Navy & Military Club in St James’ Square. The event was organised by Advent Software, whose Geneva investment management and accounting system is used by more than 100 clients worldwide include eight of the top 10 global prime brokers, eight of the top 10 fund administrators, 15 of the largest hedge funds and many leading financial institutions.
Up to now most listings of alternative funds and managers have been in Europe, with a listed although Fortress Investment Group’s IPO earlier this year may open the floodgates in the US, with Blackstone about to go public and Man Group planning to list a fund of hedge funds in New York. Until recently most quoted alternative investment vehicles were funds of hedge funds listed on Euronext Amsterdam or the London Stock Exchange as an alternative to the traditional offshore fund structure.
The move to turn fund management firms into listed companies, Young says, is being driven by a factors such as a desire on the part of founders to create stability and transparency, to create a war-chest for future acquisitions, and to establish a fair value for the business. ‘The founders may not be exiting yet, but they are thinking about what their exit might be, hence the desire to establish fair value,’ he said. ‘A flotation can also make it easier to bring in a new generation of managers to take the business forward.’
However, he cautioned that a public listing is not a cost-free exercise and will have a long-term impact on the company that founders need to consider. ‘They have to pay attention to the preservation of their firm’s DNA and the need for a mechanism to keep it in place,’ Young said. ‘Thames River Capital abandoned its IPO because they thought they wouldn’t be able to preserve the existing culture.’
Other issues, he said, include the impact of share price volatility – RAB Capital gained 11 per cent on a single day in February. Meanwhile, an existing investment manager structure designed for tax efficiency may not be well suited to the constraints of the public markets. ‘It’s critical that the operating structure is right before it is exposed to scrutiny,’ Young said.
Meanwhile, an impending flotation will be a major distraction from current operations for the executive ranks and often others. ‘Everything else will go out the window,’ he said. ‘It will probably take six months to clear up all outstanding issues. It can be done in less, but that’s more risky. And once you have gone public, the distractions will if anything grow.’