Thank you to those who emailed us questions for best-selling author Richard Bookstaber. We had a wide-ranging discussion with him Tuesday evening and will tell you more about his latest views tomorrow.
We were intrigued by a news item this morning about the reverse take-over of a publicly-traded company by Asset Alliance, an asset management firm holding minority positions in several small hedge fund firms. Asset Alliance’s business model (not dissimilar to RAB Capital, Front Point or Affiliated Managers Group) reminds us of the old Internet incubators of the late 1990s. This is not to suggest that manager incubators will suffer he same fate as their e-business cousins, since e-business incubators relied on “exit events” to make money. By contrast, these manager incubators receive ongoing cash flows from the management and performance fees of their managers (split roughly 50/50 in this case). It seems that manager incubators are in the game to build diversified asset management firms more quickly than if they were to hire their own portfolio managers, not just to cash out (although AMG’s near-IPO of AQR suggests top-of-the-market exits are always in vogue).
During a conference call this morning, Asset Alliance management said they had entertained an IPO plan last year on London’s Alternative Investment Market (AIM), but pulled the plug on that plan and instead opted for the reverse-taker route. (They certainly weren’t the only hedge fund company to shelve the IPO idea last year.)
Some of you may remember a paper by Wayne State University’s Steve Davidoff about ways in which retail investors – supposedly barred from hedge fund investing – can still invest in these funds using other means (“Black Market Capital” – see related posting). In the paper, Davidoff says that Special Purpose Acquisition Companies (SPACs) are becoming more popular than ever as a way to participate in the hedge fund boom. SPACs, argued Davidoff represented just one way that hedge funds could sidestep SEC rules and offer themselves directly to retail investors. (And if you read page 36-40, you’ll find he’s not crazy about them).
Tailwind Financial Inc., the Amex-listed company buying Asset Alliance is one such SPAC. It was listed on April 12, 2007 and capitalized with $100 million. According to Davidoff’s paper, it seems the firm had 24 months to spend the money or risk liquidation.
The deal, like those of the late 1990s, seems to make a lot of sense. The firm’s presentation (available here) contains the following chart that says comparable publicly-traded aggregations of hedge managers (Ashmore Group, Blackstone, BlueBay, Charlemagne Capital, Fortress, Man, Och-Ziff, Partners Group, Polar Capital, and RAB Capital) command multiples in the 8x-9x range while the individual managers are willing to unload for multiples in the 3x-6x range. Can you say arbitrage?
This strategy worked wonderfully for e-business incubators until the situation reversed and public market multiples fell below those demanded by potential acquirees. At that point, as they say, the capital market “taps were turned off”. Of course this is not big deal if the underlying companies can pay their own bills. But growth companies in the R&D phase dried up and blew away.
Unlike cash hungry start-ups, however, investment managers don’t rely on the public markets for survival. So the ugly fate met by e-business incubators is unlikely to be repeated in the asset management industry. But still, it may be worth reading the incubator history books here.