Man Group Plc (EMG), the world’s largest publicly traded hedge fund, agreed to buy FRM Holdings Ltd., adding $8 billion of assets invested in other hedge fund managers as its own stock price sinks.
Man Group will pay as much as $82.8 million in cash over three years, depending on the level of assets FRM retains following the takeover, the London-based firm said in a statement today. No money will be paid up front as part of the acquisition, which Man plans to complete in the third quarter.
Chief Executive Officer Peter Clarke is trying to reduce the firm’s dependence on AHL, the computer-driven driven fund that accounts for a third of the firm’s $59 billion of assets. The stock has tumbled 68 percent in the past year as AHL failed to produce gains and investors pulled money. Man will add FRM to its own fund of hedge funds unit and the combined division will oversee about $19 billion, making it the largest independent fund of hedge funds outside the U.S., according to Man Group.
“The acquisition has strategic merit,” Goldman Sachs Group Inc. analysts led by Chris Turner wrote in a note to clients today. “Execution risk appears low and this deal would increase assets in Man’s multi-manager products by 73 percent, adding size in a part of the industry where scale is increasingly a competitive advantage.”
Man Group closed up 4.7 percent at 78.8 pence in London trading, for a market value of about 1.43 billion pounds ($2.3 billion).
“Man represents a safe home for the business because we know most of the clients they’ve got,” Clarke said on a conference call with reporters today. “We’ve got the infrastructure and commitment to support this business.”
The deal will save both companies $45 million of costs each year, Man Group said. Some jobs may be cut, Luke Ellis, chief executive of Man Group’s multi-manager business, told reporters on the conference call.
“There will be certain places where there are overlaps in people,” said Ellis, who joined Man Group from FRM in August 2010. He declined to give an estimate.
Fund of funds charge an extra layer of fees --typically 1 percent of assets under management and 10 percent of any investment gains -- to pick hedge funds for pension funds, sovereign wealth funds and insurers.
Assets flooded out of the industry after firms lost 21 percent on average in 2008 and clients became spooked by fund of funds investments in U.S. fraudster Bernard Madoff. Industry assets tumbled to $643 billion in the first quarter from a peak in 2007 of $798 billion, according to Chicago-based Hedge Fund Research Inc.
FRM’s assets shrank from $15 billion in 2008, Ellis said. The firm’s investment funds would have to rise about 10 percent on average to hit so-called high-water marks, the point at which they can charge clients the most lucrative fees for positive investment performance, according to Credit Suisse AG. London- based FRM’s biggest clients are institutional investors in Asia.
FRM’s “assets came down quite quickly like everyone in the fund of funds business in late 2008, early 2009,” said Ellis. “Since then outflows have been very much stemmed. There is a significant client concentration here, which is the strength of the opportunity here because those clients know Man well.”
Man and FRM should both benefit from the acquisition because a bigger firm is more likely to win fee discounts from hedge funds, Ellis said. A larger fund-of-funds business will also benefit from its scale through cost savings and the ability to offer a diverse line of products to investors, he said. The combined company will use the FRM name, Ellis said.
Man Group bought GLG Partners Inc. in October 2010 for $1.6 billion to add individual hedge fund managers after analysts and investors said the company was too dependent on AHL.
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