(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Neil Unmack
LONDON, June 5 (Reuters Breakingviews) - Man Group’s (EMG.L) shareholders thought the worst was over. AHL, the computer-driven fund that is the hedge fund manager’s main profit engine, had recovered almost to the point where it could earn performance fees again. But recent volatility in the U.S. Treasuries market has dragged AHL down 13 percent below this so-called high watermark. The revelation pushed Man shares down 12 percent in one day.
Owning Man shares is a stomach-churning experience. Equity investors are sitting on an annualised negative return of 12 percent since the start of 2010. Continued money printing by central banks hasn’t created conditions in which AHL can thrive. Man’s management has long been conscious of the group’s unhealthy reliance on AHL. But an attempt to diversify by buying hedge fund manager GLG, combined with deep cost cutting, have only dressed the wound.
It is questionable whether a company whose main asset is a volatile trend-follower like AHL really belongs in the public equity market. A takeover would be a blessing. A large U.S. asset manager could smother AHL’s volatility with its more stable revenue, and open doors in the key North American market. The logic of this has been apparent for years. But, despite rumours of interest even from the likes of Goldman Sachs (GS.N), no bidder has emerged. While Man stock is cheap at just 10 times broker RBC’s forecast earnings for 2014 (compared to a sector average of 12 times), it’s no bargain. AHL’s unpredictability makes forecasts unreliable.
Man’s management should have a more optimistic view. A market value of over 2.1 billion pounds ($3.3 billion) means they would need some deep-pocketed backers to take Man private. The difficulty is that private equity would struggle to leverage such a volatile asset – the equity cheque would have to be big. Still, the logic of keeping Man in the public domain is waning. Having a listing can impress, but the highly visible gyrations may deter potential clients and distract management. A private company might also be able to run with less surplus capital, currently $450 million.
The evergreen hope is that AHL is just on the cusp of a sustained upturn. Don’t bet on it. Independent directors might worry about being seen to sell out to a management buyout near the bottom. But, given the recent volatility, a premium bid would be tempting.
- Shares in Man Group, the hedge fund manager, fell 15 percent on June 5 following a broker downgrade based on poor performance of its main fund.
- Reuters: Hedge fund Man Group’s shares tumble after flagship fund loss [ID:nL5N0EH0ZV]
- Reuters: Man, Aberdeen tank on AHL woes, UBS comments [ID:nL5N0EH1DS]
- For previous columns by the author, Reuters customers can click on [UNMACK/]
(Editing by Chris Hughes and Sarah Bailey)
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