| Citadels of secrecy? Hedge fund managers go public |
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| 18/03/2007 | |
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Could hedge fund managers, considered one of the most secretive of investment professionals, go public? On the heels of the first public offering of a US hedge fund management team, a number of industry experts expect others to follow. bfinance looked into the recently filed prospectus of the $29bn Fortress Investment Group to assess the risks and advantages of such a strategy. Known as a 424B, the prospectus notes that its listing on the NY Stock Exchange will strengthen its position as an alternative asset manager by attracting "people, permanence, capital and currency." Fortress will use the proceeds from the February offering to provide financial incentives to its staff through the issuance of securities, giving them a valuable compensation tool. The fund is flush with cash thanks to the offering which helped raise $565.3m. Fortress will also pay down a $250m outstanding loan facility and an $85m revolving credit facility. Another $61m will be used for general business purposes, according to the filing. "They have a war chest now to grow the business," says David Matteson, a lawyer with Drinker Biddle Gardner Carton. "Whether others will do the same depends on where the stock price is going since that will be the proxy of how well the fund is doing." Shares of Fortress have soared more than 40% since the fund went public and it trades at more than 30 x earnings. If the stock sustains these frothy multiples or moves higher, many others such as Citadel, FAC and Grovenor Capital may follow suit, says Matteson. Among the other advantages Fortress cites is currency, which "provides us with a publicly-traded security that we can use to finance future strategic acquisitions." It also intends to use the funds to diversify its business into new alternative asset strategies. "We believe opportunities exist to raise capital for infrastructure funds, real estate funds, structured debt products." What's there to hide? Fortress has three core businesses: about $17.5bn of its assets are allocated to private equity, $9.4bn to hedge funds and another $3bn to primarily real estate debt instruments. The hedge fund segment actively invests in undervalued and distressed assets with returns that tend to have a lower correlation to the broader market. Since its inception in 2002, the returns of the liquid hedge funds (or global macro funds) have been 14.2%, while the returns of the hybrid special opportunities funds have been 13.7%. Fortress is not the only hedge fund to have gone public. In the UK, the Man Group, which has interests in hedge funds, is listed on the London Stock Exchange. "They are the envy of the industry," Matteson says. "In order to go public you need pedigreed leadership, consistency of returns, absence of regulatory problems and a contractual agreement with senior management that they will remain on board for many years." In France, the $2.5bn Boussard et Gavaudan AM, went public last November with a listing on Euronext Amesterdam. The hedge fund which was founded by two former Goldman Sachs bankers helped raise €440m. Hedge fund managers tempted to take the public route will have to consider a number of risks. High on the list are employee defections, which Fortress has tried to minimise by requiring its five principals to agree to fixed terms. In addition, as a public company, hedge fund managers will be subject to the same degree of scrutiny and disclosure as many of the companies they invest in, so it is particularly important that those considering the public route not have a tainted history with regulatory authorities. Finally, the managers will face the same short-term performance pressures that most public companies are subjected to from investors. VB |
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