Man and GLG: is this the industry's game-changer?

Mon May 24, 2010

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We should be getting used to surprise coalitions by now...


By Nick Evans, editor

We should be getting used to surprise coalitions by now. First, the UK's Conservative and Liberal parties join forces in a power-sharing government that promises to transform the political landscape in Britain. Now Man and GLG are teaming up in a deal that could have equally far-reaching implications for the fast-changing investment management landscape.

Is it a game-changer for the hedge fund world? Yes. The combination of Man and GLG is awesome - both in the enlarged group's current strength and breadth of business, and in its future earnings potential. And, like all good coalitions, it looks pretty obvious with hindsight.

Regulation is changing the marketplace for hedge funds - not just through the EU's flawed directive, about which more than enough has already been said to last a lifetime, or through half-baked measures such as Germany's unilateral new ban on naked short-selling of bank shares, Eurozone government bonds and sovereign CDS.

It is also being changed through the application of greater global regulatory oversight (with which it is hard to disagree in principle) of an industry that is an increasingly central part of the world's rapidly changing financial system.

Investor attitudes are changing fast too - with a greater focus on liquid strategies, operational and business stability, uncorrelated performance and counterparty strength as well as rapidly growing demand for onshore as well as offshore investment products.

Scale, diversification, resources, distribution: these will be the key attributes of the leaders in the alternative asset management industry, aside from the traditional and overwhelming one of performance, and these are what a combined Man GLG group should be able to deliver in spades.

The enlarged group will span all of the key hedge fund investment areas - managed futures, equity, macro, emerging markets, credit and convertibles - in a single operation, with the potential to structure funds and strategies in almost any type of offshore or onshore format, and to combine different strategies in ways that offer almost endless variations for investors in terms of market exposures and return streams.

So there are lots of reasons why the combination of Man and GLG should work. Whether it will work or not is another matter. Big is not always better - and the optically compelling revenue synergies that could flow from the merger will depend heavily on Man's distribution machine continuing to work as effectively as in the past, and on GLG continuing to produce genuinely first-rate investment products to sell.

Many people have long predicted a wave of consolidation in the alternative investment industry. On paper, that looks right and logical. But, in reality, putting together people businesses with strong and idiosyncratic cultures has proved difficult.

And it has proved particularly hard at the smaller end of the scale, where those businesses are still heavily influenced by the people who started them and where the synergies of any kind of combination with other equally esoteric operations may be hard to realise.

At the other end of the scale, though, consolidation is much more achievable - and most of all among quoted fund management groups, which have already had to get accustomed to operating in the public rather than the private world.

The inescapable fact is that the big are getting bigger in the alternative asset management world - and the financial crisis has only served to reinforce and accelerate that trend. In Europe, the groups that have benefited most from the general industry rebound have been those that were -already the largest - like BlueCrest, Lansdowne, Brevan Howard, Winton and others.

Does that mean the end of the boutique? No. There is always room for specialists in any industry - and the alternative asset management business, more than most other businesses, needs a constant flow of new entrants and innovators to keep the bigger incumbent players on their toes and to give investors the widest range of choice.

But life is changing - for the big battalions as well as for the smaller shops - and a new and more mature era is genuinely emerging. "Our world is changing," said Man CEO Peter Clarke. "The barriers to entry are rising. Balance, scale, resources and relationships are key."

Mergers of people businesses are notoriously hard to execute. There is plenty that could go wrong with the Man GLG deal. They are two very different kinds of organisation in terms of culture, history, investment ethos and management style. Putting them together will not be easy in practice. But it is hard to disagree with the theory.