Hellman & Friedman hits snags in Gartmore exit

(updated with correction)

Hellman & Friedman LLC, a premier private equity investor in money management firms, is finding its final exit from a 2006 investment in Gartmore Investment Ltd. more turbulent than it bargained for.

Less than a year after Gartmore's initial public offering, the firm's November announcement that key man and hedge fund heavyweight Roger Guy is leaving could take some of the shine off what had looked to be an unadulterated success for San Francisco-based Hellman.

Along with the news about Mr. Guy, Gartmore announced that it had hired Goldman Sachs & Co. to consider “strategic options” for the firm, with investment bankers seeing the likeliest outcome as a sale to another U.K.-based money manager in the next few months.

Opinion differs on whether London-based Gartmore should count as a blemish on Hellman & Friedman's stellar record in the money management sector.

Admirers say Gartmore's woes shouldn't diminish Hellman's claim to bragging rights as the industry standard in that sector, along with Boston-based TA Associates. Hellman's reputation was cemented by deals such as backing the management team of London-based equity boutique Mondrian Investment Partners Ltd. in a 2004 buyout from parent Lincoln National Corp. and a 2006 investment in Artisan Partners LP, a Milwaukee active equity shop.

“No one in the industry is more experienced or knowledgeable than Hellman & Friedman executives” when it comes to making well-thought-out investments in money management firms, said Darlene T. DeRemer, managing partner and head of advisory practice with investment banking boutique Grail Partners LLC, Boston. The rough waters Gartmore finds itself in this year simply show how key-man risk is an unavoidable land mine when investing in firms with sizable hedge fund operations, she said.

Others point to Hellman's decision to take a 50.4% stake in Gartmore at the time of the firm's MBO — departing from its usual preference for leaving a majority of the equity in the hands of the target firm's managers and professionals, despite the obvious key-man risk — as a reason Hellman should be held more accountable for the way Gartmore was managed in the run-up to this year's difficulties.

According to the prospectus Gartmore issued ahead of its December 2009 listing, Hellman & Friedman fund vehicles had “indirect beneficial ownership of approximately 55% of the company.”

Even in a worst-case scenario going forward, private equity players say Hellman & Friedman's investment in Gartmore has already proved a lucrative one for investors in its private equity funds.

With a recapitalization shortly after the management buyout followed by Gartmore's public listing a year ago, Hellman & Friedman was able to lower its stake from slightly more than 50% to roughly 20% today. “They made their money many times over on Gartmore,” noted one Boston-based competitor, who declined to be named.

Patrick Healy, deputy CEO of Hellman & Friedman and head of the firm's London office, declined to comment about any aspect of his firm's investment in Gartmore.

In retrospect, selling shares at the IPO price of £2.20 (about $3.56) late last year proved a case of good timing, as the perfunctory listing of risks in Gartmore's prospectus — including potential portfolio manager misconduct and the outsized importance of Mr. Guy's European large-cap team — ended up looking like a prophecy.

When the firm's prospectus was issued in December 2009, Mr. Guy's team was managing well over a third of Gartmore's assets under management.

Roughly three months after the listing, Guillaume Rambourg, Mr. Guy's highly respected investment partner, was suspended for breaking internal Gartmore rules prohibiting portfolio managers from directing trades to favored brokers. Mr. Rambourg briefly returned to the company but resigned in July shortly after news that U.K. regulators were investigating him.

While Gartmore and Mr. Guy weren't targets of that investigation, Mr. Guy chose to resign four months later. The investigation is ongoing.

Those departures followed a year that saw a number of high-level hires as management, backed by Hellman & Friedman, worked to diversify Gartmore's business. The additions included John Anderson, who joined Gartmore in February 2009 from Rensburg Fund Management as head of credit; Kam Tugnait, who joined from Standard Asset Management in May 2009 as head of high yield; Leigh Himsworth, who came to Gartmore in July 2009 from Royal London Asset Management as head of U.K. equities; Jan de Bruijn, who left Threadneedle Asset Management in October 2009 to become head of Asian equities; and John Bennett, who came to Gartmore from GAM Holding Ltd. in early 2010 as senior portfolio manager, European equities.

The sheer scale of the changes over a brief period stretched the resources of Gartmore's management team, and a set of tough internal rules forbidding portfolio managers from directing trades to favored brokers, implemented over the objections of most of the firm's senior investment managers, set the stage for the turmoil of the past year, said one Gartmore insider, who declined to be named.

For Hellman, whose investments in money managers have been guided by what current senior adviser and former managing general partner Matthew Barger described in 2006 as the goal of helping “wrongly owned” firms achieve independence, it's unclear whether Gartmore's likely sale to another owner in the coming months will dent its reputation.

Most private equity competitors and investment bankers say Gartmore's eventual disposition will amount to more of a bruise than a black eye for Hellman.

“An unblemished record has now got a red mark,” but Hellman & Friedman will still be No. 1 when it comes to investing in money managers, said one New York-based investment banking veteran, who declined to be named.