When U.K. Chancellor of the Exchequer George Osborne officially opened Man Group’s new City of London office in July 2011, not long after cutting the ribbon at a similar ceremony for Japanese bank Nomura, he joked, “When I did this at Nomura, the whole thing almost fell down.” Happily, both buildings still stand, but, less happily, both firms are now in crisis. Man’s CEO for the past five years, Peter Clarke, said on December 10 that he will be stepping down in February after more than a year of capital outflows and disappointing performance. It’s not clear, however, how CEO-designate Emmanuel (Manny) Roman, the president and COO, can turn things around.
“A change of leadership is unlikely to have a material, near-term impact in itself,” says Peter Lenardos, a financial services analyst at RBC Capital Markets in London. “Man needs to continue to focus on fund performance, gathering assets and ensuring that its funds are fairly priced from a competitive point of view.”
Man faces stinging criticism from investors and analysts after suffering net capital outflows for five successive quarters. “The board has been asleep,” says one investor. Man’s total assets under management stood at $60 billion on September 30, down from the $71 billion they reached following the completion of the company’s $1.6 billion acquisition of GLG Partners in October 2010 — a deal that Clarke hoped would be transformational. That decline took place despite the acquisition in July 2012 of FRM, a fund-of-hedge-funds firm with $8 billion under management. The group’s share price, meanwhile, was a mere 80.6 pence ($1.30) on December 12, down about 70 percent since the GLG merger.
It’s been a difficult year for many hedge fund firms, of course. But, Lenardos says, “there are other listed alternative asset managers that have performed better than Man’s share price, so the problems that Man is encountering appear to be company-specific.”
Two years ago, GLG — with its fundamentally driven investment approach and avowed “star culture” — seemed an attractive acquisition target for Man Group, which relied heavily on its computer-driven, trend-following AHL unit. The deal has yet to deliver on its promise, says David McCann, a financial services analyst at Numis Securities in London. “AHL is far too dominant a part of the group,” he explains. “Man doesn’t disclose the exact figures, but my research shows it accounts for more than 70 percent of the group’s profits.”
Man Group made a pretax profit of $121 million in the first six months of this year, most of it from management fees, compared to $230 million in the same period in 2011. At the end of September, AHL, which charges relatively high management fees of as much as 3 percent a year, was some 15 percentage points below its high-water mark, above which performance fees become payable again. “GLG is still not profitable, partly because of its high compensation ratio of about 65 percent,” says McCann. AHL’s compensation ratio is less than half that of GLG, because it is essentially a collection of computer programs.
Man’s current situation is a far cry from where Clarke, who has spent 20 years at the company in various roles, had wanted to be. The former M&A lawyer told Institutional Investor in an interview in March 2011 that he hoped Man could grow to become a $100 billion-plus group. “I anticipate the hedge fund industry in five to ten years will be three to five times the size it is now, and I expect Man to grow commensurately,” he said at the time, a projection that seemed to imply Man could manage as much as $200 billion.
“Peter is more of an M&A man, but now we need someone like Manny whose operational experience will help him drive performance and to cut costs,” says a source within Man.
Roman isn’t talking in detail about a new strategy yet, but he seems committed to the existing plan to cut costs by $100 million a year, in addition to the $95 million already announced. He said in a statement on December 10 that he will be “intensifying our focus on delivering performance for investors in our funds, strengthening and deepening our relationships with clients and maintaining pressure on costs.” Clarke said on the same day: “Despite the very tough trading conditions since 2008, Man has developed three strong pillars of investment expertise, namely AHL, FRM and GLG, while also remaining in robust financial strength. We have also built an excellent team of experienced senior management.”
Roman — one of three GLG principals who joined Man in 2010, along with Pierre Lagrange and Noam Gottesman — will be hoping that the GLG funds deliver good returns to investors. As of September 30, more than three quarters of its funds were within 5 percentage points of their high-water marks.
