Hedgies go IPO?

Caught via Fintag

$11.5 BILLION ALTERNATIVE ASSET MANAGER TO GO PUBLIC

Halcyon Asset Management announced today that it is taking the hedge fund firm public with the aim of keeping top talent. The New York-headquartered firm is accessing the public equity markets through an acquisition by its affiliate, Alternative Asset Management Acquisition Corp.

The transaction values Halcyon at approximately $974 million.

Under the terms of the agreement, members of Halcyon entities will receive up to $505 million in cash and notes, and will retain LLC interests in Halcyon exchangeable into shares of AAMAC on a one-for-one basis.

The terms also provide for the ownership of the Halcyon exchangeable interests to be adjusted upward contingent upon achieving certain stock price targets. Halcyon members will initially own approximately 43.6% of the fully diluted ownership interest of the new entity.

Partners of Halcyon entities will further align their interests with fund investors, reinvesting 75% of the after-tax cash proceeds in Halcyon funds, typically for three years, at full fees to the public stockholders. Halcyon's partners will enter into lock-up and non-compete agreements, and their equity consideration will generally vest over five years.

It seems pretty cool. At a moment when banks are squeezing hedgies with liquidity, the hedgies go to the public markets to get whatever liquidity they can. For funds who prided themselves on being exclusive "by invitation only" and other non-sense going public sounds definitely "geisha" but I guess money talks, even if it is anonymous.

What I like about it is the idea that management is now accountable to a board and shareholders. Compensation is set by a compensation committee and transparency of dealing will start being more of the norm. It can only help the hedgies.

And since debt is senior, only the hedge funds that are not too leveraged will be able to float otherwise, margin calls will wipe out equity in a New York minute. Bottom line is only healthy hedge funds will be able to float.

Obviously I need to understand better what is going on but if 20% of profits are shared with "shareholders" instead of kept to the firm, then that is good. Let's look at the numbers:

Assets: 11B = Equity 1B + liabilities 10B.

So the fund is 10X leveraged after money injection. It is some leverage but not outrageous which is probably why they go ahead of the curve and turn to public markets for funds. Without knowing how much capital they have today it is hard to say how pressed they were for money and what the starting leverage was.

They take 500M out? That seems rather steep.

Going forward. 2% fee? == 20m. That is cashflow enough to support 75 NYC people? Of course the biggy is in the performance fee. A 25% performance fee of 20% profit is 5% yield and a payout of: 550m of which they keep 46% or 250m. I guess this is a way for them to reinstate the "performance fees" of yester-year but in the public markets. hmmmm I don't know about that, word on the street is you can get funds to waive perf fees. It is unclear to me how much capital they bring. If they bring 46% of capital, then it is a fair transaction, if not... it seems they are reclaiming a part of the perf fees on your money. Well hey, they may quite literally walk the street now, a step-down for what used to be "by invitation only" rings, but the girls are not waving their performance fees for just any joe-blow. You gotta have some dignity.

At least the control is in the hands of the shareholders (in theory) but 46% share means the dividend payouts at the levels above reconstruct the massive payouts of the past.

But any way. I like reading about rather constructive news around the hedge funds. Some know they are going to feel the bank pinch and are taking steps to find their liquidity elsewhere by going IPO and raising a bunch of money.