Forgive me if this is a noob question but I'm used to valuing nice, easy tech companies.
I was on CapIQ reading up on Man Group's acquisition of GLG Partners (both fund managers) and I was wondering how exactly do you value a fund manager?
In GLG's case they have common stock, so despite their "private" nature they operate in a public manner, and you pretty much just value them in the typical method. But how would you value a private fund manager?
If I wanted to buy the business would it be as simple as just paying for the operations of the business, or would I have to buy their investments too?
u want to pay the NAV of their holdings?????
I dont mean holdings as in other companies stock, I just mean the NAV of their investments.
ok after edit ur original text sounds better. :)
Maybe NAV, then add in other operating assets.
Then you have the most important part: the intangibles. THE MANAGEMENT! REPUTATION!
Interesting question
You'd have to factor in the manager's track record, looking at returns over the past X years, consistency of those returns, alpha, etc...
Would you value a company just solely on value of its operating assets or how it's actually UTILIZING those assets to generate outsize returns? These things seem pretty subjective... i.e. it boils down to whether or not you like the fund's overall investment style and whether you have a want/need for that expertise in yoru fund.
Just some food for thought. If anyone has actual experience valuing fund managers feel free to comment.
We actually just bought out a pretty large PE fund manager, at a slight discount to NAV. It was a Fund-of-funds, so the Fund manager didn't really add much value. We basically bought it for the recurring revenue stream and client base. The seller needed liquidity, so they were willing to part with the fund at a discount.
A hedge fund might be different, since there isn't the long-term lockup of a PE fund, so less need for a liquidity discount to be priced in.
Just came across the same issue actually. I'm assuming you are valuing the HF manager? There's a couple different metrics to look at, but the big three are AUM, Revenue, and EBITDA.
Most of the value of a HF comes from the management fees (revenue) they take in, so you can look at a multiple of revenue (~2-4), multiple of EBITDA (don't want to do a hard-and-fast multiple range here), or a percent of AUM (~1-3%). Really the only costs associated with managing a HF are compensation (definitely biggest) and some minimal overhead. Any revenue above those costs is where the value is created.
It's really hard to get an accurate picture though, because with the high-water mark compensation structure and volatility of the funds in general, revenue and AUM can change drastically from one year to the next. I puzzled over this for a while, then realized there really isn't a right answer. Just take a multiple and run with it, your guess is as good as any.
There's not much in the way of transactions out there, and guideline public companies you can look at are rarely pure hedge funds.
Hope that helps.
How to Value a Hedge Fund? (Originally Posted: 01/19/2013)
http://www.mergernetwork.com/buy-businesses-for-sale/investment-manager…
$150 million kind of sounds like a steal for $3 billion in AUM, if we're playing by the 2/20 rule. At that valuation, it appears that anyone who buys a hedge fund and achieves annualized returns of ~10% will be filthy rich.
Am I missing something here? The only thing I can think of is people withdrawing money from the fund once they find out the previous fund manager is leaving, but I don't think that alone would justify such a steep discount.
Have you ever seen the movie Arbitrage?
Hedge funds always sell for huge discounts compared to other businesses with the same level of profitability.
Problem 1: key man risk: most hedge funds will lose a lot of assets if the top person leaves (or some other small group of people near the top) Problem 2: performance fees: these fees are highly unpredictable. If they were super predictable, the person probably would not be selling. Problem 3: adverse selection: people usually only want to sell interests in their GP (or the entire GP) when there is a major problem Problem 4: profitability vs. revenue: there needs to be major restrictions on compensation to ensure outside owners get their fair share and all of the profits don't get bonused out to employees. Problem 5: massive tail risk: underperformance, key man leaving, or some of the other things mentioned above can make the business worth zero very quickly.
Problem 6: no physical assets: if the fund loses assets, there is no liquidation value. Problem 7: regulations or legal action can put it out of business overnight 8-100: there are so many possibilities of making a zero
The likely answer is that there is serious hair on this. My guess is that they are under the high water mark and could be headed for (or are already in) a death spiral.
Thanks. That's a pretty solid answer. +1 SB for you.
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