(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.