Hedge funds going public:
Hedge funds think of going public
(by Julia Jenson)
Hedge funds may soon open up their book to the publics and are ready to float their shares. If the hedge fund industry that used to be the haven of the affluent investors who have at least $1 million to throw around goes public, it will make funds a part of the average investor’s menu. Common people might eventually be able to pocket the industry’s impressive returns.
"Going public hasn’t been a very popular strategy in the past, but it also isn’t unheard of and it may be gaining momentum for several reasons," said Robert Schulman, co-chief executive at money manager Tremont Capital Management.
So far the most famous publicly traded hedge is the European Man Group PLC. It is rumored that Chicago-based Grosvenor Capital Management, with over $13 billion in assets under management, might be considering a similar move. A Grosvenor spokesman offered no comment.
The most important obstacle on the way to incorporation for hedge funds is the need to open their books to the public. Although the funds are subject to registration starting next year, the requirements of the SEC can turn out to be more rigorous.
Even so, going public offers new possibilities for hedge fund managers who are seeking to attract new capital at the time when wealthy investors are becoming picky and are looking for other investment opportunities.
"Going public could be very lucrative and a great way for companies to get more access to capital," said Justin Dew, a hedge fund analyst at research firm Standard & Poor’s.
http://www.financegates.com/news/funds/2005-03-25/hedge_2503.html
Hedge Funds Flirt With Heresy: Going Public
By JENNY ANDERSON
Published: September 15, 2006
Hedge funds — fast-growing private investment pools of capital — are known for their secrecy.
That is partly because federal regulations prohibit them from advertising or talking to anyone but their investors. But being private and secretive also enables them to develop investment strategies and manage their business, big fees included, without the Corporate Library criticizing their outsize pay.
So it is not without some irony that a hedge fund named the Fortress Investment Group may be the first to tear down those walls of secrecy. Fortress is considering an initial public offering this fall in a deal that could value the company from $5 billion to $7 billion, according to people who have been briefed on the plans.
A spokeswoman for Fortress, which has $24.3 billion under management, declined to comment.
If it should go ahead, a Fortress offering would be the first public listing of its kind. A successful offering could pave the way for a stampede of interest from other seasoned hedge funds as well as private equity giants that might be looking for ways to turn their huge hoards of private money into public asset-management companies.
Such a move would go against the grain: companies seem more likely to go private rather than public. But for Fortress, going public would give it another way to raise money to build the business as well as a tool — its shares — to retain talent. Stock would also give Fortress a currency to buy other companies. And it would allow the founders to cash out some of what they have built and create a succession plan.
Indeed, the challenges that Fortress could address with an I.P.O. are common to a number of successful hedge funds, private equity firms and other alternative asset management groups as their businesses grow and mature. If things go well, the founders and a few principals of such firms build up a good business, the organization grows and the founders make a gazillion dollars.
But then what? When they want to leave, do they just close up shop? They could pass it on to the next generation, but if it’s big enough — say Blackstone or even Fortress — the next generation can’t afford it. They could sell to a big financial institution, as when J. P. Morgan Chase bought Highbridge Capital in 2004. But few banks seem to share J. P. Morgan’s appetite for multi-billion-dollar hedge funds.
Going public solves succession and retention issues while creating a more permanent institution. Several major private equity and hedge funds have also contemplated going public, including the Citadel Investment Group, a $12 billion hedge fund in Chicago and the private equity firms Kohlberg Kravis & Roberts & Company and the Blackstone Group.
Kohlberg Kravis has gone further than its private equity rivals and put its toe into public markets: in May it sold shares in an affiliate that trades in Amsterdam on the Euronext exchange. Investors bought shares in the $5 billion fund, which entitled them to a piece of the profits Kohlberg Kravis makes buying and selling companies. But the offering also allowed Kohlberg Kravis to keep the management company under control, holding on to its privacy and secrecy.
Fortress, however, is contemplating something radically different: floating its own business rather than the funds it manages. That means allowing investors to buy into the enormous stream of fees earned by the investment adviser as well as the incentive compensation.
The Man Group, a London-based hedge fund first went public as a commodities broker with hedge fund operations. Today it is the largest hedge fund group in the world with $54 billion in assets under management and $1.2 billion in profits for its 2006 fiscal year. Other funds have imitated Kohlberg Kravis by taking funds public, using the money to invest. But no one in the United States has undertaken what Fortress is considering: taking the central nervous system of a hedge fund public.
Fortress is not a typical hedge fund. It manages $24.3 billion and has 500 employees, according to its marketing materials. It calls itself a “global alternative investment and asset management firm.” The description seems apt, considering its size and the fact that it has offices in London, Rome, Frankfurt, Geneva, Tokyo, Hong Kong, Sydney, Toronto, Dallas and San Diego.
The firm is a prime example of convergence in asset management: it operates private equity and hedge funds and it competes against banks to lend money directly to corporate clients. The result is a firm with various lines of business that looks more like Goldman Sachs than a traditional hedge fund.
The firm has $11.1 billion in private equity. Since 1994, its five principals have invested in 77 private equity transactions representing more than $55 billion of assets, according to its marketing materials.
It operates about $10 billion in hedge funds that invest in everything from global stocks and currencies to fixed income, or debt-related securities; it also has $3.2 billion in dividend-paying companies. Drawbridge Global Macro, one of its hedge funds, has had an annual return of 14.6 percent since it was founded in May 2002, according to the HSBC Private Banking Report. Annualized returns on its private equity funds top 40 percent, according to a person familiar with the returns.
There are some big disadvantages to being a public company. For one, public companies are heavily regulated with significant disclosure requirements. Hedge funds have resisted such disclosure.
There is also the issue of structure: hedge funds are generally run by an investment adviser that manages money for individuals and institutions. Hedge funds generally charge investors a management fee of 1 to 2 percent and a performance fee of 20 to 25 percent of profits. Different products at Fortress will have different fee structures, but 2 percent of $24.3 billion is $486 million, and managers make a lot of money.
Fortress may not pull off an offering. Until August, the stock market was treacherous and it is unclear whether there is enough investor appetite for new offerings.
Its bankers have to come up with a valuation, a notable challenge considering how little precedent exists and how many pieces to the puzzle exist. (Of course, Goldman Sachs is a public company and many people still wonder how they make money.)
The bankers and principals will also have to determine how much of the company to take public. Ideally for investors, the stake would be relatively small in order to make sure management continues to have a direct incentive to perform.
Then there is the issue of whether it is valued like an asset management company, which typically carries a price-to-earnings ratio of 20, or more like a broker with a price-to-earnings ratio of 8 to 10.
A person knowledgeable about hedge fund valuations said it would be a mix: the income from management fees would be valued at the higher multiple, as with an asset manager, and the performance income would be valued less as it is more volatile, closer to the low end of the brokers.
Regardless of the price — and expect the underwriters to go for gold since it is the first one — the deal reflects the stark reality that the hedge fund industry, once a niche and secretive, is quickly changing.
Assets in hedge funds have increased 3,000 percent since 1990 with almost 9,000 funds now entrusted with $1.2 trillion of capital. Once a playground for the rich, hedge funds now have institutional investors, like pension funds and endowments.
That has translated to some transparency and the realization by managers that they do not need to produce 30 percent returns with huge swings, but rather 8 to 10 percent returns without the roller coaster ride.
The game has shifted to gathering assets, making fees from managing those assets and contemplating once-heretical moves like going public. The question, until now, has simply been who would go first. Fortress may be the first to let the drawbridge down.
http://www.nytimes.com/2006/09/15/business/15insider.html
Hedge Funds Continue Public Path
By MICHAEL J. de la MERCED and JENNY ANDERSON
Published: July 3, 2007
Increasingly skeptical investors and lawmakers are apparently not enough to deter yet another hedge fund giant from going public.
Och-Ziff Capital Management, a $26.8 billion hedge fund founded by a former Goldman Sachs trader and members of the Ziff publishing family, filed for a $2 billion initial public offering yesterday. It joins a burgeoning field of alternative asset management companies that are seeking to raise capital in the public markets, acquire stock to use in deals and cash out their principal.
Since the debut of the Fortress Investment Group five months ago, selling shares to the public has become the latest achievement in an industry — alternative asset management — that not too long ago would have scoffed at the prospect of public ownership. Indeed, private equity firms profit by taking companies off the market and improving their operations. On its first day of trading, Fortress stock gained more than 60 percent.
But that rosy outlook began to fade last month when Congress intruded on the marketing of the offering for the Blackstone Group, the giant buyout firm. Two groups of legislators introduced bills to increase tax rates on private equity firms and some hedge fund managers. One would significantly raise taxes on partnerships related to investment management that go public; the other would increase taxes on “carried interest,” a term for the hefty performance fees that make up the bulk of buyout firms’ compensation.
Blackstone went public at $31 on June 22, raising $4.75 billion. Its shares gained 13 percent the first day and then began a slump that put them below the offering price. They were unchanged yesterday at $29.27.
Last week, GLG Partners, one of Europe’s biggest hedge funds, said it would pursue a listing in the United States through a merger with a holding company here.
Unlike Fortress and Blackstone, which have substantial private equity operations, Och-Ziff appears to be the first pure-play American hedge fund to seek an initial offering. As such, it offers a rare glimpse into the performance, asset growth and profitability of these kinds of firms. Hedge fund managers earn a management fee of about 2 percent of assets as well as about 20 percent of the profits.
Och-Ziff’s assets under management have grown rapidly, to almost $27 billion from $5.7 billion at the end of 2003, according to the firm’s prospectus. Its returns in recent years have not notably surpassed those of the S.& P. 500-stock index: for the last three years it had an identical return, and for the last year it returned 15.7 percent compared with the index’s 15.2 percent. Since inception, the main fund returned 17 percent compared with 11.6 percent for the S.& P. 500.
But in a point it will be sure to make to prospective investors, Och-Ziff has delivered those returns with less risk. Since 1994, the S.& P. 500 has been almost three times as volatile, and over the last year the broad market index has been more than four times as volatile.
“Achieving the same level of return while taking less risk is a commendable goal for investors,” said Ted Seides, director of investments at Protégé Partners, a fund of hedge funds, “though it’s not always the case that a lower volatility of returns equates to less risk.”
In 2006, Och-Ziff made $954 million in management fees and incentive income, up 93 percent from 2005. It paid $185 million in compensation and benefits. The firm has 300 people, 125 of whom are investment professionals and 18 are partners.
Hedge fund managers are allowed to defer their income offshore if they manage offshore funds — which are often set up to allow tax-exempt investors, like endowments, and foreigners to invest without facing taxes in the United States. Och-Ziff’s managers have about $1.8 billion in deferred income. The fund’s principals will invest all of the proceeds from the initial public offering back into the funds, where it will have to remain for five years.
Like Fortress and Blackstone, Och-Ziff plans to offer a stake in its management company, organizing itself as a master limited partnership that gives public investors limited say in the firm’s governance. Unions led by the A.F.L.-C.I.O. have led the charge against these private equity firms’ going public, and members of Congress have taken notice. The bill introduced last month by the top two members of the Senate Finance Committee would more than double the tax rates on carried interest.
Yet the Senate bill gives Fortress and Blackstone a five-year grace period on the higher tax rates, a concession not available to Och-Ziff. That may not matter eventually: the House’s legislation would eliminate the transition period, and Senator Max Baucus, one of the sponsors of the Senate bill, said he was open to narrowing that time frame.
The firm plans to trade on the New York Stock Exchange under the ticker symbol OZM.
http://www.nytimes.com/2007/07/03/business/03hedge.html?ref=business
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