Gartmore: Under New Ownership

Management buy out paves way for new era for hedge fund giants

Stuart Fieldhouse
Originally published in the June 2006 issue

It was nine months in the making, but Gartmore was finally sold last month to its management by former owner Nationwide Mutual. The deal was the largest private equity-financed agreement of its kind in the asset management sector, with US private equity house Hellman & Friedman providing the finance in return for 51% of the company.

It was, in the view of Gartmore's new directors, the best deal for both the firm's employees, and its investors, and it certainly seems that many of Gartmore's larger investors were most interested in an MBO, rather than seeing the company acquired by yet another financial services giant. The firm has been quick to establish the new structure and its advantages with its investor base: a brochure that went out to the UK IFA market recently proclaimed: "Gartmore: under new ownership (you might already know a few of them)," along with pictures of some of the managers who will now have a stake in the business. The message was clear: our managers now own the business, they have a proprietary stake in remaining with it, and making sure it performs to the best of its ability.

There were a number of potential buyers interested in Gartmore from the get go, including rival asset managers, so-called 'platform' buyers (large scale diversified financial services businesses), and financial buyers (e.g. private equity firms). "We have a very defined business model," says board member, President and CEO, Jeff Meyer. "We believe very firmly in managing long only money and long/short money side by side, often off the same platforms. It had to be a good deal for our shareholders, it had to be a good deal for our clients, and it had to be a good deal for the staff of Gartmore."

An in-market deal, it was felt, was probably not in the best interests of the firm. Gartmore had been here before, most recently with the firm's sale to Nationwide Mutual by NatWest in November 2000. During such periods of uncertainty, fund managers leave, clients lose confidence and take their money out of the firm, unnecessary disruption is caused.

A management buy-out also avoided the prospect of yet another platform buyer acquiring the firm. It would break the cycle of the firm changing hands every five years or so. Fund management entities that find themselves part of a larger financial conglomerate can often end up being neglected when the parent company experiences a lack of direction. The asset management subsidiary can spend a couple of years treading water while the platform tries to decide what to do with it, and inevitably ends up selling it on yet again. The history of the UK fund management sector alone over the past 10 years is littered with examples of established fund management brands either being absorbed with mixed success into a larger parent, or being sold on when the parent decides its new toy is not what it wanted after all.

For Gartmore, a firm which led the charge by established asset managers into the hedge funds field with the launch of AlphaGen Capella in 1998, the growth in the European hedge fund market has been a major boon. Its range of hedge funds has grown to compose an increasingly important part of its overall product offering, and its has enjoyed close synergies with its established long-only business, not least of which has been its enviable network of distribution relationships, including its Japanese client list.

"Of the financial buyers Hellman & Friedman really stood head and shoulders above the rest," says Feeney of his new partners. "We were very impressed with them. They understand the asset management business very well. They've got a lot of proven experience in helping management teams buy out their business, and making that work. They are long term holders, with an average holding period of five to seven years, and they like to see as much equity in the hands of the people with whom they are working."

Roger Guy, Investment Director, gave his comments on why H&F were the suitable partners for Gartmore: "H&F is one of the few private equity companies with a successful track record of investing and supporting management teams in the investment management arena. Guillaume Rambourg and I, together with our team, are 100% committed to Gartmore as a result of this transaction. I have taken a seat on the Board and I am working with the existing senior management members and our new partners from H&F to build on Gartmore's success."

Guillaume Rambourg, one of Gartmore's Founding Partners, added: "This is an exciting time for Gartmore. We want to build on our successes in the retail, institutional and hedge fund markets. H&F has a strong track record of assisting fund management companies to realise their true potential. I am confident that Gartmore will thrive under this new ownership structure."

The deal also put the right ownership structure in place, giving those accountable for delivering alpha a stake in the business. "Our clients want stability," says Feeney. "They want to know their managers are there, that they are locked in. I would say Gartmore is more stable now than it has been in its forty odd years of history."

The deal precipitated changes in the way Gartmore structured its management as well. For example, it had two emerging markets desks, and took the decision to merge them. Chris Palmer, manager of the AlphaGen Pictor emerging markets hedge fund was tapped to head up the new team.

"This is also about creating more accountability, a flatter management structure," explains Feeney. "What our clients want is access to the managers who are delivering alpha. The team leaders have to be the lead managers." He wanted to get away from a situation where general managers who were not managing money were still leading the investment teams. "It's an incredibly powerful structure," he says. "Everybody is pointing in the same direction. Taking employees and turning them into partners is an incredibly powerful mechanism, for energising the business, for focusing the business, and ensuring that what everyone is doing is delivering what our clients value, which isalpha and client service."

One big name that looked set to leave the fold was Tim Callaghan, although he announced a change of mind only three weeks after the deal was announced, abandoning his projected move to Resolution Asset Management. Colleagues Adrian Darley and Joanthan Fearon still walked over to Resolution however, while Callaghan was tempted to stay with Gartmore for a partner-level role and more of a say in management. It is a demonstration of the kind of flexibility that Gartmore now enjoys in its negotiations with senior employees that it simply did not have previously.

Other departures include Philip Ehrmann, who ran several of Gartmore's Asia Pacific funds, and UK Growth manager Jon Thornton. Two of Ehrmann's funds are being transferred over to Gartmore's in-house quant team.

"It is unusual," says Jeff Meyer, Gartmore's CEO, of the new structure. "It is the largest buy-out of an asset manager. The assets are the people, and the more closely you align them with the shareholders and the clients, the more likely you are to get a successful business model. It is quite pure, quite simplistic."

Feedback from clients during the deal was very positive, with both Gartmore and Hellmann & Friedman receiving private gestures of support from major investors during the negotiation process. One long-standing hedge fund client told management that its one nagging doubt had been the ownership structure, and whether Gartmore would be able to retain fund management talent. In this investor's view, the MBO was the best outcome: fund manager incentives are aligned in a complete way now. "Throughout the deal period flows into the hedge funds continued to be very strong, both from existing clients as well as from some pretty high profile new investors in the AlphaGen funds," says Martin Phipps, who now heads up the alternatives division. "It was pretty much business as usual for the hedge fund business, although there were a number of deals sitting on the sidelines waiting for the transaction to happen, and those deals have now been executed."

Gartmore is also quick to fend of concerns that new board member Roger Guy would be distracted from the management of his flagship AlphaGen Capella fund. Meyer confesses it was not an easy task persuading him to take a seat on the board, and that Guy's condition was that he did not have to attend more than four meetings a year, that they were held in the UK, and that they were held after the market closed. "He's got no interest in managing the business on a day-to-day basis," says Meyer.

The deal is being viewed by senior management as a vindication of its strategy to date, particularly since 1999. The focus will continue to be to stay competitive in the high alpha equity and alternative investment field, running long only and long/short funds side by side. "We will continue to sell out capacity on those funds that are not closed," says Feeney. "On the mutual fund side of the business we will continue to stay focused on high alpha and probably increasingly total return via UCITS III, which is a new development in the market which we can take advantage of. We will absolutely continue in our growth trajectory."

"We no longer have to focus on a corporate transaction," says Meyer. "We no longer have to focus on the stability of certain managers. We now have alignment across the whole business. We have really simplified the business in a way that allows us to get back to what we should be doing, what we want to do, which is investment performance and looking after our clients. A lot of the other noise has gone away."

Approximately half of the 49% of the company H&F will not own is going to the employees, either via rolling over their existing equity or buying into the company under the same terms and at the same price as H&F. The remainder of the equity will be granted toemployees over a period of time. The majority of equity will be held by the key fund managers, with a smaller portion going to senior executives.

What happens to the hedge funds? Gartmore insider Martin Phipps will now be head of alternative investment distribution. Already director of the single manager business prior to the sale, Phipps will now be taking over all-distribution activities for alternative investments. He has been with the firm since the acquisition from Banque Indosuez by NatWest in 1996, when he was appointed co-head of its international division. He was named head of single manager hedge funds in 2000, and stayed on after the acquisition by Nationwide Mutual in November 2000.

Gartmore has taken the hedge funds suite to new heights since the early years of Capella, including the strategic decision to build in a quant capability, with the appointment of Mike Gleason from the Putnam organisation.

"My priority will be to grow the alternatives side of the business," Phipps says. "It has grown very significantly this year, through a combination of new flows and positive performance. Most of the growth has come from investors committing new capital across quite a broad range of funds. We have also reopened a number of our funds."

For example, AlphaGen Pyxis, the firm's Japanese long/short smaller companies fund was reopened to new investment, and reclosed very soon afterwards when it reached $250m. AlphaGen Hokuto, the large cap long/short Japan vehicle also reopened to new investment earlier this year, and reclosed at the $500m mark. Phipps has been very happy with the speed at which new capacity has been taken up and sees it as a major vote of confidence in the strategies Gartmore is running.

Gartmore's hedge funds business was also the subject of an intensive launch program in 2005. "It was actually a function of things coming out of the pipeline at a similar point in time," Phipps says. "The first half of last year was particularly busy in terms of new fund launches. This year so far we've launched three new funds, and I daresay we may well launch another fund between now and the end of the year. I think the growth will be focused on existing funds where there is capacity yet to be sold, and more generally we're broadening our range of quantitative strategies."

Gartmore has launched two quant funds over the past 12 months, and Phipps says further launches from Gartmore's internal quant desk will be forthcoming, coupled with a broader ambition to develop the range of quant strategies into other asset classes than equities over time.

Gartmore's Boston office, opened in December 2005, will also serve the expansion of the inhouse quantitative resource, with the prospect of more hires to work in the US. "The quant business is a global business, and it makes sense to have a presence in North America as well as here, and Boston is a sensible place to be, given that there is a big pool of quantitative talent there in the shape of several other firms that are pre-eminent in that space," says Mike Gleason, Head of Quantitative Investment Strategies.

Losing its US parent is not expected to impact Gartmores alternatives business. In Feeney's view, there were few synergies in place for the hedge funds to be able to exploit. "We did our own thing in the States to be honest," he says. "We had one salesperson on the ground who was hired just over a year ago, and the intention is to build a larger presence in the US over time, focused on our Boston office. I think it's fair to say that being based in Europe, with most of our focus on European investors and Japanese investors, our share of capital from US investors is less than we'd like it to be. We've got some exceptionally good and long-standing clients who are US-based, and we'd like to develop that business further and reach more into endowments and foundations, and perhapspension funds over time."

On the long only side, Gartmore will be retaining a five year distribution agreement with Nationwide Mutual, but given that the vast majority of Gartmore's business on both the long-only and long/short side of the book is sourced outside the US, the arrangement really serves to maintain existing sub-advisory relationships.

Gartmore's Japan operation remains as one of the real jewels in its crown going forwards, and has been widely envied by the UK asset management community. It is likely to continue to play a critical role in the ongoing expansion of Gartmore's alternatives business. "Japan is ultimately much more established than our Boston office, as we've been there for a while, and it remains very much a strategic priority for us," Meyer says. "We have a very strong sales team there, we have a very strong investment team there, and you will continue to see us competing in that market, and developing that office going forward. It's a very successful part of our business."

Gartmore's Japan investor profile remains 100% institutional, sourced from the life and non-life companies, pension funds and banks. It is a market where relationships are key, and Gartmore has benefited from keeping in place a sales team with long-standing connections in the Japanese market. In November last year it named Takashi Muramatsu as CEO of its Japanese subsidiary following the retirement of Jun Miyazaki. Muramatsu has been with the group since 1995.

Globally, Gartmore also continues to enjoy the support of in-house operations and legal teams, as well as risk management systems and dealing desks, infrastructural assets that remain the keystone of its appeal to institutional clients.

The directors are emphatic that this back-up team has played a critical role in the development and growth of the business and will continue to do so going forwards.

Hellman & Friedman: private equity player with penchant for asset management Hellman & Friedman has risen to prominence as one of the most active and experienced private equity firms in the asset management sector. Founded in 1984, it has achieved outstanding returns over 22 years, and is currently investing a $3.5bn fund, of which $175m came from the individual partners of the firm. The Gartmore deal follows on the heels of its $125m financing of a management buy-out at Mondrian Investment Partners, the $50bn London-based investment outfit, from parent company Lincoln Financial.

"It is not a coincidence that many of the best and most enduring asset management businesses are independent, managementowned entities," says Allen Thorpe, Managing Director at H&F's New York office, who played an active role in the deal and will sit on the Gartmore board.

One of the areas the H&F team focused on from the start was the high quality of risk management that Gartmore habitually employed within its operation: "Smart risk management is a universally shared responsibility that is, and will continue to be, practiced by every person at Gartmore, and will continue to receive rigorous senior management and board level attention," says Thorpe.

H&F's investment philosophy has been to identify strong management teams in outstanding businesses, with endurable competitive advantages. Sustainable cash flow and attractive growth prospects are also factors. The firm is particularly experienced when it comes to investing with companies going through a transition, be it privately or closely held businesses looking to institutionalise, to go public, or to de-mutualise.

"It's good for the people of Gartmore," says Thorpe of the MBO. "It gives them the economic tools, the structure, the strategy, and the governance to go forwards with confidence. The ownership has been in question for years and years; now all that's behind them. We've had a universally positive reception for the deal: a transaction like this clears away a lot of the uncertainty."

Alongside Thorpe on the Gartmore board will be Blake Kleinman and Patrick Healy, both based in London and actively involved with the Gartmore deal. They were supported by a London team that included Zita Saurel and Stephane LeViet.

Healy is also a director of Mondrian. Kleinman is an ex-investment banker from Morgan Stanley's M&A department who joined H&F in 2001, and has also been involved in the Mondrian deal. As a firm, H&F has been active in the European asset management market for nigh on 20 years, so it was not surprising to see its name as one of the interested parties.

"It's a very good deal," says a partner with another private equity firm which also looked at the potential transaction. "It was the third or fourth time this business has been transacted, and there were some in the investment industry who had formed a jaded view of Gartmore. Frankly, this is a good deal for H&F. There was less appetite in the market to deal with Gartmore again, so it was not surprising that the pricing on the deal was pretty good. It was a long and messy process, and they had to compete with Schroders in the final round, but the pricing levels were very attractive. It may not be that distressed a business at all."

Gartmore earned credibility in the eyes of some private equity investors attracted to the potential deal in the early stages through its ability to handle the pain of losing much of its institutional business in the previous bear market. They felt the business was being underpriced by Nationwide Mutual.

H&F's experience in the asset management business has stood it in good stead when bidding for a business against established money management firms keen to get their hands on Gartmore's share of the alternatives pie. It plans to behave as an active shareholder at the board level, while relying on Gartmore management to run the business. "We're not operators, and we don't pretend to be," says Thorpe. "We're tough owners – we won't be lax about it. But there are areas where we can be helpful, such as compensation. We put a lot of credence in empowering management."

H&F has been familiar with Gartmore for much longer than the 10 months or so it was involved in ownership talks. "The whole framework is pretty sexy," says one PE analyst familiar with Gartmore. "It hinges on the cash-flows out of the alternatives business, but if that's repeated frequently enough, the pricing [for H&F] is going to be pretty good."

The independent view is that the most likely exit for H&F will be an IPO, at least seven years from now, if not longer. An acquisition of a larger stake in the company by Gartmore management is viewed as less likely With 114 leveraged buy-outs in the asset management business, very few have involved recapitalisation. Whether Gartmore would be able to do it is an open question: according to one private equity specialist, "to achieve it you would need healthy growth to pay down debt. The business has been growing at a healthy clip for five or six years… the highest price will usually be realised [for the private equity partner] via a sale to a strategic buyer or an IPO."

Will we see more deals of this kind emerging going forwards? Blake Kleinman thinks so: "I think you'll continue to see managers buying themselves out," he says. "How sustainable is it for fund managers to be owned by a larger enterprise? I think you'll see people continuing to leave places where the ownership doesn't make sense."

Exactly what the most likely exit strategy for H&F will be, well, it's too early to say. Certainly the new Gartmore directors can only speculate. Obviously one option would be an IPO, while another would be the acquisition of more of H&F's stake. "This is very much a partnership," Paul Feeney says. "This would be a joint agreement as to how we'd do that. Certainly there are a number of options: as we sit here today, going to market seems like the most obvious route."

"The key thing is what sort of transaction maintains continuity of ownership, continuity of key people, continuity of clients," says Jeff Meyer. "An IPO does that. A sale to a third party is possible, but it's a pretty low possibility. It would have to be a situation where all the key managers wanted to do it because they saw value. I think that's pretty unlikely."

"Someone just putting a price on the table, leading to managers leaving, and funds being merged, that does not work," Feeney adds. "Which is why the most obvious route is to go to market."

Given that H&F tends to hold its asset management investments for more than five to seven years on average, this is not a question that will be occupying minds at Gartmore or H&F in the immediate future.

Gartmore's history: breaking the acquisition cycle



British & Commonwealth establishes Gartmore


Gartmore opens Japan office


Paul Myners joins as Chief Executive Officer


Paul Myners promoted to Chairman


Acquisition by Banque Indosuez


Gartmore PLC quoted on London Stock Exchange; 25% offered to the public


Takashi Muramatsu joins Gartmore


NatWest acquires Gartmore NC Investment Management in Japan


Launch of first long/short equity strategy by Roger Guy


Nationwide Mutual buys Gartmore


Paul Myners steps down as Chairman; Paul Hondros appointed non-executive Chairman


Gartmore acquires Riverview International, specialist fund of hedge funds business in New Jersey; Paul Feeney joins the firm


Strategic alliance and distribution agreement with Aspect Capital; AlphaGen Regulus quant strategy premiers on Lyxor


Gartmore signs strategic marketing agreement with UFJ Trust in Japan


Jeff Meyer appointed Chief Executive Officer


Hellman & Friedman buys Gartmore from Nationwide Mutual


Hellman & Friedman's previous asset management ventures

  • Delaware International Advisors Ltd. (renamed Mondrian): In 2004, H&F supported management in the purchase of their $60 billion AUM international value institutional firm from their parent, Lincoln Financial Group.
  • Artisan Partners: In 1995, backed management to create what is now a $45 billion AUM institutional and retail asset manager†. In 2006 H&F announced agreement in principle to invest in the recapitalization of the business.
  • Franklin Resources, Inc.: In 1992, led a $150 million investment to facilitate Franklin's acquisition of Templeton, Galbraith & Hansberger, Ltd.
  • Brinson Partners, Inc.: In 1989, backed Gary Brinson to buy-out First Chicago Investment Advisors to create Brinson Partners (later sold to Swiss Bank)
  • Oeschle International Advisors: In 1986, backed management to create this firm, now managing $15 billion of international equities.†
  • Farallon Capital Management: In 1986, sponsored management to form the now $18 billion absolute return money management firm.†