Man-FRM integration going smoothly, says COO
Integrating FRM into Man Group has been a “smoother than expected process” with the combined entity now benefiting from greater internal resources and enhanced distribution channels, FRM’s COO has said.
Man Group’s $82.8 million (contingent on FRM retaining assets) acquisition of FRM, announced on May 21 2012, caught many industry observers off guard. The joint venture created the largest fund of funds outside of the US running $19 billion in AuM.
“Mergers are often challenging but integrating FRM and Man Group has been a straightforward process. There is a lot of convergence in our business model and the cultures in the two organisations are broadly similar. We have successfully integrated our investment team and all of our personnel have now moved to Man’s offices on Swan Lane,” said Patric de Gentile Williams, COO at FRM Capital Advisors.
De Gentile Williams said the appointment of Man Group’s Luke Ellis, a former managing director at FRM, as CEO of the combined business, had been a major driver behind the successful integration. “Luke Ellis is familiar with the FRM business having spent most of his hedge fund career there, which has certainly helped,” he said. Operational challenges do remain though. “Integrating IT and technology will take more time but that is always the way with mergers,” said de Gentile Williams.
Like most mergers, there has been rationalisation and redundancies in areas of overlap. This should not come as a shock given that Man Group told shareholders it would make $195 million in cost savings amid recent underperformance. “There has been rationalisation but we have kept the best of both breeds and the integration was made at a very early stage,” commented de Gentile Williams.
The merger will certainly enable FRM to become more proactive in seeding. The firm has quietened down its activity of late with the merger in full swing. Nevertheless, seeding as a whole has been hit as investors increasingly hoard cash amid market uncertainty and volatility. According to a survey by Citi Prime Finance, just $5.6 billion in capital went to 352 launch funds in 2011. A mere $12.4 billion or 0.6% of total hedge fund AuM today has been invested in start-ups since 2009, the same survey added.
Others have argued seeders are facing growing pressure from accelerator funds. Accelerator funds are in effect early stage investors who allocate to managers with around two years track record. However, their terms and conditions are often less onerous than seeders in that they do not take as big a share of future profits.
Despite this, de Gentile Williams remained optimistic about seeding. “We have seen lots of people and potential managers. There are a huge number of opportunities out there and a lot of very talented people are approaching us. Working with Man Group gives us access to some very experienced personnel and analysts familiar with seeding. Our resources have been increased, and our investment strategy will in no way change,” he said.
There was also debate as to whether the FRM/ Deutsche Bank seeding managed accounts platform – the dbalternatives Discovery Platform – will continue given that Man Group already runs one of the world’s biggest managed accounts platforms. “Man supports our seeding managed accounts business with Deutsche Bank. They view it as something which complements our existing business,” said de Gentile Williams.
Both firms will also benefit from greater distribution. Man Group already has a substantial footprint in Asia-Pacific (APAC) with roughly 25% of its total AuM coming from the region, as does FRM. “Both of our firms have gaps in certain markets and we will work together to fill in those gaps to market to more institutional investors. We are going to be putting a particular effort into marketing into North America,” added de Gentile Williams.
The deal would also reduce Man Group’s dependence on its flagship computer driven hedge fund AHL, which has historically been one of its main revenue generators. The $19.5 billion AHL has struggled of late posting losses of 2.2% this year, having declined by 7.7% in 2011. Man Group itself has suffered losses as a result coupled with large redemptions. AuM now stands at $52.7 billion, down from $71 billion in June 2011. The company’s share price has also dropped 67% over the last year prompting relegation from the FTSE 100, although there was a brief rally following the FRM announcement.
Funds of funds more broadly have still not recovered from 2008. A Deutsche Bank Prime Brokerage survey showed 55% of investors were forgoing funds of funds in favour of direct investment into hedge funds or via the increasingly powerful investment consultants.
Meanwhile, a study by Credit Suisse revealed 43% of funds of funds said they want to be acquired, a massive jump from 23% in 2011. This year has seen several funds of funds put themselves on the market. EIM, a one-time darling of the funds of funds world, has seen its assets shrivel by half to $7 billion since the crisis prompting its founder Arpad Busson to put the company up for sale. Whether a buyer is forthcoming remains questionable.
FRM, too, saw its assets plunge by approximately 50% to $8 billion since 2008. The company was valued at $600 million in 2007, a far cry from its 2012 selling price. FRM’s main investor Sumitomo Mitsui Trust Bank Limited was widely reported to have pushed for the sale. “Funds of funds are consolidating. Our driver behind the merger was purely to provide our investors with a deeper range of services and it is something they have welcomed,” said de Gentile Williams.