Fortress has undertaken an IPO of its management company, Citadel has launched a bond and a growing number of hedge funds and alternative investment managers are listing funds in order to raise assets under management – next up is Brevan Howard.
Are investors in these securities getting a good deal? Given the relative newness of alternatives houses raising long-term capital, making valuations is more of a stab in the dark than a science.
In the case of an IPO of a management company, most would agree that the management fee would be valued at a higher multiple than the performance fee, which is lumpier and less predictable, but which accounts for most of the upside. Yet in the case of the Fortress valuation, it would appear that there was little, if any, differentiation in the valuation. Quite who the investors were who made a judgment that Fortress was undervalued and bought stocks pushing the share price up 68% on the first day is a mystery. It seems likely that the demand was due to the “fad” element, helped along by heavy marketing of the IPO as the “first US hedge fund listing”. In fact, only $9 billion of Fortress’s $29 billion of assets under management is in hedge funds. Most is in private equity. However, given the disappointing performance of some private equity listings it wouldn’t have been wise to stress this to investors.
On the debt side, though, it seems that investors might be getting a good deal. Not knowing quite where to price Citadel’s $500 million five-year floating notes, the bookrunners looked at where similarly rated financials were trading, and then whacked on a premium. The notes launched at a yield of treasuries plus 190 basis points, while similarly rated financials yield around 125bp over treasuries. No one has any idea what Ken Griffin is doing in his multi-strategy fund but at least he has promised to sit down with the 35 bond investors and keep them up to date.
Nevertheless, these valuations have no real foundation. Investors should approach with caution.
