Investors have been waiting years for the chance to buy a stake in hedge fund Millennium Management. The snag — and the appeal — is that there aren’t many listed firms to compare it with as founder Izzy Englander prepares to do a deal.
Millennium is an eminent multi-strategy fund manager. The model involves running an array of investment teams with expertise across equities, fixed-income, commodities and so on. Each gets a slice of a single pool of capital. The firm is brutally meritocratic – the so-called pods must perform to survive. Average investment performance is around 14% annually since inception, according to Bloomberg News.
Recent talks on selling a 10% to 15% holding have been at a possible $14 billion valuation. This is high relative to the approximately $75 billion of assets the firm manages — but that doesn’t necessarily mean the price is too rich. With alternative asset managers, what counts is profitability — and potential.
There are some uncontroversial reasons for the septuagenarian Englander to want to sell a slice of the management company now. Distributing some equity creates a currency with a snapshot value that can be used to attract and retain the next generation of leadership. Of course, it may also be true that Englander just reckons the prospects of getting a good price may deteriorate. Potential investors — likely to include those who already entrust wealth with Millennium — should be on guard.
The conventional attraction of shares in fund companies is the profit generated by management fees of around 1% to 2% levied on clients’ assets. These cover overheads with a margin on top. Their allure is their predictability, especially at private equity firms such as Blackstone Inc. or KKR & Co. that may tie up money for, say, seven years. But Millennium doesn’t charge management fees. Costs, including portfolio manager pay, are passed on to clients directly. The investment case here must rest on Millennium’s performance fees — something investors in this sector normally don’t value highly, given performance can’t be assured.
Millennium can nevertheless offer incoming shareholders a lucrative income stream. For starters, its performance levies have a guaranteed minimum. Clients pay a floor fee of 1% of managed assets if investment performance is below around 5%; otherwise, they pay away 20% of investment gains. Moreover, client funds are locked up for five years. Combine these features with a track record of high performance, and there’s an element of dependability to the economics.
