Creditflux Newsletter

The sale of credit manager Solent to Aladdin is a small step in the much heralded process of asset manager consolidation. But the crunch has left many managers without scale and with diminished growth prospects, so why are closures, mergers and takeovers amongst managers as rare as ratings upgrades?

This question is the credit market’s version of “Why do drug dealers still live with their moms?” – which was posed in the best seller Freakonomics. Award-winning economist Steven Levitt describes the economics of the drug trade on the south side of Chicago. Most dealers, he says, make pennies and so have no choice but to live with their moms. They keep at it not primarily because of addiction or lack of a job but because this is their one shot at being as rich as the one dealer on the south side who does drive a big car and wear expensive clothes.

In credit land it’s the same. Many managers are clinging to their businesses because they still dream of the riches that can accrue if they can just start raising money again. This focus on the outlier upside makes tolerable years of scraping by on senior fees only (CSOs) or management fees only (funds).

Leaving aside the relative morality of credit managers and Chicago drug dealers, we should salute the tenacity of some managers who feel a sense of responsibility to continue to manage their customers’ money, even if they personally have more productive things to do. But managing money with scaled down resources, fewer researchers, limited coverage from market makers and low morale isn’t doing anyone any good. Credit then to the Solent team for finding an exit which leaves their investors in the hands of a competent manager and enables (some of) the talented Solent team to move to more productive platforms.

Will we see more consolidation soon? Those bankers that ply their trade by advising on mergers amongst managers believe so. Their consistency in believing this matches their persistency – but both vastly outweigh their perspicacity. The rally in the market and the flood of funds into credit will likely encourage those managers still living with their moms to commit to yet another year of thin gruel.

What of those hedge fund managers that have shut up shop and moved on? Wolseley notes that some are still able to raise fresh money. Look down Creditflux’s list of credit fund start ups over the last few months and you will see not a few managers who left their former investors nursing substantial losses. Let us hope that both the managers and investors have learned lessons from the experience of 2007-2008.

Meantime the folks at fund manager Gartmore are plotting an alternative to consolidation – an IPO. Well known to the credit markets after an LBO sponsored by respected west coast private equity firm Hellman & Friedman, the loan market watched with unease as Gartmore’s leverage increased through 2008 as performance suffered and ebitda declined. Assuming Gartmore’s float is a success, other managers will tap the impressive multiples into their calculators and will be sorely tempted to follow suit.

Yet consolidation, closures and reopenings, and IPOs all come at a price. It takes time and attention to complete one of these transactions, and that is time and attention that comes out of attention paid to maximising investor returns.

Let us hope then, that like the Solent team, asset managers heed the needs of their investors as they contemplate the way forward for their businesses.

Wolseley is a leading practitioner in the credit market. Feedback is welcome at wolseley@creditflux.com