Shirley Chan - Associate of Public Markets
Noam Gottesman - Chairman and Co-CEO
Jeff Rojek - CFO
Craig Siegenthaler - Credit Suisse
Robert Lee - KBW
GLG Partners, Inc. (GLG) Q2 2009 Earnings Call August 6, 2009 8:30 AM ET
Good day, ladies and gentlemen, and welcome to the Q2 2009 GLG Partners, Inc. Earnings Call. My name is Glen and I will be your coordinator for today. (Operator Instructions).
I would now like to turn the presentation over to your host for today's call, Ms. Shirley Chan, Associate of Public Markets. Please proceed.
Good morning, everyone. Thank you for joining us for our second quarter 2009 investor and analyst conference call. On the call with me today is Noam Gottesman, our Chairman and Co-CEO; Jeff Rojek, our Chief Financial Officer; Simon White, Chief Operating Officer; and Michael Hodes, Director of Public Markets.
Earlier this morning, we issued a press release announcing our financial results for the second quarter of 2009. Following our prepared remarks on the quarter, we will open the call for Q&A.
I would like to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. There are important factors that could cause actual outcomes to differ materially from those indicated in these statements. Some of these factors are described in the Risk Factors section of our filings with the SEC.
I want to remind you that GLG assumes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise unless required by law. I would also like to remind everyone that, in addition to financial results prepared in accordance with U.S. GAAP, GLG presents certain financial measures such as adjusted net income, non-GAAP weighted average fully diluted shares and non-GAAP compensation, benefits and profit share that are not prepared in accordance with U.S. GAAP.
A reconciliation of these non-GAAP financial measures to GAAP is included in our earnings release. A copy of which is available on our website and has also been furnished this morning with the SEC in our Form 8-K.
Finally, I would like to mention that this is not intended to be an offer or solicitation for investment in GLG Partners or any particular GLG funds.
I’ll now turn the call over to Noam for an overview of the quarter.
Good morning. We are pleased to have the opportunity to speak with you today, and provide an update on our financial results and the performance across our funds and managed accounts.
We delivered on our primary objective of strong risk adjusted investment returns for our clients. Our alternative funds were up 8.5% for the second quarter, 13.3% for the first half and 16.3% for the year-to-date through July.
Our long-only funds were up 27.4%, 16.2% and 23.7% for the same timeframe. Effectively, this 500 to 1000 basis points better than the weighted average benchmark performances. Details on how these returns were calculated could be found in our press release issued earlier today.
We continued to see unique opportunities in the present environment with last year's market disruption still weighting on the broad cross section of asset classes and a generally more fragmented and less robust competitive environment. We believe that GLG is very well positioned to deliver strong risk adjusted returns in the future given the depth of our investment team and our disciplined and focused approach to the market.
Our net assets under management flow trends appear to be stabilizing and we're seeing a pickup in the level and quality of interest from both existing and prospective investors.
The legacy GLG, that is excluding the business we recently acquired from Société Générale, second quarter net outflows were approximately $400 million versus net inflows of $50 million in the first quarter, and net outflows of $2.5 million in the fourth quarter of 2008.
The redemption cycle triggered in 2008 appears to have largely apt, and we believe we will ultimately be a leading beneficiary of industry flows resume given our track record, the breadth of our business, our robust infrastructure and our high level of transparency. That said, there will be some residual spillover outflows, approximately $500 million in the third quarter as we lifted suspensions in the past few weeks or nearly all our funds on which we had remaining suspensions.
The acquisition of the SGAM UK added $2.6 billion of net flows for the second quarter, leaving us with 6.8 billion in related assets at the end of June, which is in line with our expectations. Strong investment returns and the stable high quality client base have long been hallmarks of GLG, and it is refreshing to see these attributes resurface.
Moreover, our robust infrastructure, which encompasses strong operational and compliance-related controls, as well as the high level of transparency to our investor clients is increasingly servicing as a differentiated approach.
From a strategic standpoint despite the economic uncertainty, we took a series of decisive steps over the past several months to enhance our financial flexibility and broaden our long-only offerings. We successfully completed the acquisition and integration of SGAM UK, a UK-based long-only asset manager.
As many of you know, we started out by offering traditional and alternative strategies and we will continue to develop that as a multi-strategy firm. We strongly believe that the flexibility we afforded to multi-strategy firms like us is the ability to be ambidextrous. This allows us to offer choice and structures more closely tailored each investor's needs.
We have significantly increased our financial flexibility by purchasing half of senior debt for $0.60 in a dollar, raising $228.5 million of fresh capital through a convertible notes offering and restructuring our credit agreement in order to among other things to eliminate all financial covenants.
We have successfully rescaled our cost base to better meet the requirements of our business without compromising our fiduciary responsibilities to our investors. General and administrative expenses fell over 23% from the fourth quarter of 2008, despite the addition of SGAM UK following a series of targeted cuts and contract negotiations with various suppliers, and we remain disciplined in compensation.
We are committed to managing our expenses with an eye towards the economics of the business. Our profile as a company and an investment manager has clearly evolved into the past year. One important byproduct in this evolution is that the mix of our AUM is now tilted more towards long-only and managed account offerings, which carry lower fee yields relative to those found on our alternative funds.
The broadening of our platform is clearly a long-term positive, so this change in mix has compressed our margins. That said, we hit our new run rate for management and administration fee yields in the second quarter, and will ultimately benefit from an infrastructure that can accommodate a substantially larger asset base with little incremental cost.
We have positioned ourselves to operate profitably at current run rate management and administrative fee yields, and expect to see substantial operating leverage should be continued to deliver strong investment returns on fee net inflows resume.
Now, let me pass you over to Jeff Rojek our CFO who will run through the financial results in a little more depth.
Thanks, Noam. I am going to provide some details and the highlights for the quarter. Non-GAAP adjusted net income was $85.3 million and the ratio of non-GAAP adjusted net income to non-GAAP weighted average fully diluted shares was $0.26 and GAAP net loss attributable to common stockholders was $24.4 million or $0.11 per share.
As we've previously disclosed in the GAAP the company expects to recognize in the next few years significant and largely non-cash expenses associated with our November 2007 reverse acquisition transaction with Freedom Acquisition Holdings.
In the quarter, the GAAP net loss resulted primarily from the recognition of $128.9 million of acquisition-related compensation expense. There are also several significant items totaling $69.8 million after-tax, consisting of the following that impacted our non-GAAP results this quarter.
Approximately $75 million after-tax gain on the extinguishment of debt in connection with our successful debt restructuring and convertible bond offering in May, $4.1 million of acquisition and restructuring cost pre-tax, $3.2 million after-tax tie to the acquisition of SGAM UK, and a $2 million pre-tax and after-tax operating loss from SGAM UK in the quarter. SGAM UK now with the GLG franchises, GLG UK should be slightly loss making in Q3 and accretive thereafter in line with our original expectations for the acquisition.
In addition to these items, our GAAP results included a $20.3 million or $0.09 per share benefit, net of intangible amortization from negative goodwill arising from the acquisition SGAM UK. That gain reflects the difference between the fair value of the assets we acquired and our purchase price of $6.5 million net of intangible amortization for the period and has been excluded from our non-GAAP adjusted net income.
From a revenue perspective, we saw a significant decline year-over-year, $86.1 million versus prior $188.8 million a year ago. This decline is attributable to two main factors. Our average net AUM fell 22% year-over-year and rose 64% sequentially in Q2 of 2009. Specifically, our net AUM for the quarter stood at $19.1 billion, which is up $5.1 billion from March and down $4.6 billion year-over-year.
Our net AUM was up sequentially in quarter two on 1.8 billion of positive performance, 2.2 billion of flows inclusive of the SGAM UK purchase and $1 billion of favorable currency translation. On a year-over-year basis, net AUM was down on 4.8 billion of negative performance, 0.9 billion of flows inclusive of the SGAM UK purchase and a 0.6 billion unfavorable impact from currency translation.
The mix of our AUM has evolved substantially over this past year, as we shifted towards a broader-based investment platform with greater representation from long-only fund and managed accounts, although waiting of some of our higher yielding AUM has declined. These trends are accentuated with the April addition of AUM from long-only manger SGAM UK.
Further, as private placement and other not readily realizable investments were transferred into special asset vehicles late last year, the management fees charge on these designated funds were significantly reduced. Our management administration fee yield was 89 basis points in second quarter of 2009 versus 139 basis points in quarter one, adjusted to exclude the SGAM UK sub-advisory mandate, and that compares to 184 basis points in the quarter two 2008.
For reference, I know in quarter two 2009 legacy GLG had a management admin fee yield of 119 basis points as SGAM UK averaged approximately 40 basis points. The performance fees were $37.9 million versus $78.2 million a year ago. These results largely reflect first half performance, as it is GLG's policy to recognize performance fees when they crystallize, which is generally on June 30 and December 31 of each year.
Although first half 2009 performance was significantly stronger than the same period a year ago, less of GLG's AUM were above the respective high water mark and in a position to earn professional fees. We finished June with approximately 5.4 billion at or approximately 14 billion in potential performance fee earning AUM above or very close to being above high water marks for the related hurdles.
On the expense front, we continue to reduce and monitor our general and administrative cost base as well as competition benefits and profit share levels, notwithstanding that the trends in Q2 were a bit mighty by the addition of SGAM UK. Non-recurring restructuring cost associated with SGAM UK added $4.1 million to our expenses, approximately $3.3 million to compensation and approximately $0.8 million to G&A.
Internally, we view compensation using the measure non-GAAP compensation benefits and profit share or non-GAAP CBP, which reflects GAAP compensation benefits and profit share adjusted to exclude acquisition-related compensation expense in connection with the reverse acquisition transaction with Freedom.
Our second quarter 2009 non-GAAP CBP dropped 55% from the year ago period to $43 million due to lower employee compensation and benefits as well as lower discretionary bonus approvals and profit share. Non-GAAP CBP as a percentage of net revenues and other income fell 1 percentage point to 50% through the second quarter of 2009 compared to the year ago period.
SGAM UK restructuring compensation cost as a percentage of net revenues and other income was approximately 3.8% for the second quarter 2009. Note that compensation benefits and profit share can have largely discretionary components and is finalized primarily on full year performance as of December 31 of each year.
In terms of non-compensation related expenses, our second quarter 2009 general, administrative, and other expenses decreased 16% from the year ago quarter, even after $2 million restructuring costs and $0.8 million in non-recurring costs associated with SGAM UK. This is mainly due to our targeted initiatives to better align expenses with our current AUM levels.
On the tax front, we reported on a non-GAAP adjusted net income basis an effective tax rate of 13.4% for quarter two 2009 versus 23.9% in the same period last year. The tax treatment of the extinguishment of debt gain was the main driver below effective rate on a non-GAAP adjusted net income basis. Per-tax gain of $84.8 million was approximately $75 million after-tax. We expect the range of 20% to 25% to the effective tax rate in the second half of 2009 in line with the way we've discussed this in the past.
Our acquisition of Société Générale Asset Management UK was completed on April 3, 2009. As a reminder, we pay £4.5 million or approximately $6.5 million in cash to purchase SGAM UK. We continue to expect this transaction to begin to be slightly accretive on an operating basis later this year.
On Lehman Brothers I want to briefly mention that we continue work out the issues regarding our funds exposure to the administration of the LBIE. Progress is being made and we will concentrate our efforts to continually push on the front on behalf of our fund investors.
Before I turn the call back to Noam for some closing comments, I want to mention that we have enhanced our AUM level disclosures in our second quarter 2009 earnings press release and have updated our investors presentation, both of which are available on our website www.glgpartners.com and has been filed this morning with the SEC on our Form 8-K.
Thanks, Jeff. We are emerging from a remarkable period at GLG. Looking back, we have rendered a series of substantial stress tests over the last 12 to 18 months. We lost a major team under lion's share the asset they have managed. The significant counterparty of our Lehman Brothers went bankrupt. The capital markets were broadly in disarray, our 2008 investment performance disappointed and we along with the alternative asset management sect in general faced sizable redemption cycle and selectively imposed gates and introduced side pockets.
Further in certain respects, our traditional European high network clients suffered more extremely, the GLG investments excluded than many other market participants. We have to navigate this difficult period with a focus on creating liquidity to meet redemptions and satisfying prime brokers. The liquidity squeeze clearly hurt our performance and our clients. Fortunately, we have managed successfully through the storm, and today as our performance of tests are fully focused on delivering client returns. Our investment management team had been strengthened and we continue to some selectively hire very high quality individuals.
The mix of our asset is very different and that has implications for our margins. We have broadened our platform, have returned all of our funds to their traditional liquidity terms with the exception of some side profited assets, enhanced our financial flexibility in our debt repurchase and convertible note offering and significantly strengthened our bench of investment professionals with some high profile and very expensive hires.
We have also seen very strong investment performance and stabilizing net flows year-to-date. We particularly want to note that our convertible strategies are having a very strong year after a difficult 2008 and our Japanese long-only strategy has extended its excellent long-term track record. In addition, our long-short strategies are generally performing exceptionally well, of note our European, UK and North American long-short strategies.
Further, the teams we took on last fall in emerging markets in macro are off to a terrific start and have been very well integrated. We have positioned to be a leading beneficiary as industry flows resume given our performance record, the breadth of our business, our robust infrastructure and the high level of transparency.
Importantly, we can operate at current run rate profitably and expect to see substantial operating leverage should we continue to develop a strong investment returns of net inflows resume. As a firm we have always been opportunistic and we are excited about the range of opportunities in front of us but strategically and on the investing front.
Operator, let's open up the call for questions please.
(Operator Instructions). Your first question comes from Craig Siegenthaler from Credit Suisse. Please proceed.
Craig Siegenthaler - Credit Suisse
Maybe just a big picture question here first. I am just thinking your major client target really in the U.S. is defined benefit plans, which were over allocated to both fixed income and cash now. I am wondering what's the opportunity here for hedge funds, especially in light of the strong absolute returns this year?
We think the opportunity is great. However, it's hard to predict how quickly they will head into hedge funds, either renewed return to hedge funds or a first time introduction. We are participating and involved in many meetings and focused on and level of interest is extremely high. As you correctly note given the returns in the equity markets away from cash, away from credit cash has become expensive and they are looking to diversity.
So we think on the traditional long-only side, we're definitely seeing moves and we are seeing allocations and we're seeing great interest. On the alternative side, there is clearly interest, I think it will take some more time to see flows resume with any sort of great velocity, but it's clearly beginning.
Craig Siegenthaler - Credit Suisse
Then maybe just to take that and some of your comments I guess worth for GLG. Looking at the second half, if we exclude the $500 million of redemptions you already talked about from lowering gates. I know your comments are kind of for stabilizing a [ramp]. Can we think about positive underlying net flows in the second half of this year, excluding the $500 million of redemptions that you already talked about?
I think it's very hard to forecast. I can tell you that we are engaged in a large number of client meetings and mandate speeches, but it's hard to try and put our fingers on how quickly these will evolve, but clearly we're very pleased to see a massive ebbing of redemptions. There is still a bit of noise and we remain I would say highly optimistic about the flow picture that we're seeing. It's just hard to be able to pin it down to a quarter.
Craig Siegenthaler - Credit Suisse
Then I just had one question on SocGen acquisition, and its impact on income statement. The business actually was a little bit dilutive this quarter. I am wondering when should we expect to start being accretive and we'll come shortly from the expense side or is it more or likely they come from organic growth and take a little longer?
As I said in the remarks, I think that probably for Q3, it may be slightly dilutive. We expect in Q4 to start to be slightly accretive and then more sort of accretive as we move forward. I think from that probably from a combination synergies on the G&A sort of expense side and our prospects for growing the business.
Your next question comes from Roger Freeman from Barclays Capital. Please proceed.
Hi, it's [Steven] here for Roger. Just wondering about compensation and with recent news of some employee turnover, is there a comp pressure that we are seeing and how are you crewing at this stage for year end?
Our total compensation levels and related disruption in bonus amounts are as you know determined by reference to annual firm and individual performance. As in the past we remain committed to rewarding our personnel for the contribution and are confident. Then we can strike the appropriate balance and compensation between the overall firm economics and what is required to retain and attract the top investment professionals in our industry. So we feel that the same policy as before.
Can you talk a little bit more specifically about some of the turnover that we saw in the European equity fund?
Yes. I think the change is a part of this business. We are hiring many more people than we have had departures. The person in questions, fine analyst, we wish him well. He managed a very small portion of money and we are not making any replacement given that he was part of the big and successful team already. I think it's much to do about nothing.
More of a strategic question here. In terms of the US market, what sort of traction are you gaining at this point in terms of market share gain and how much of these conversations are just kind of resuming from where the financial markets like prior to the dislocations and what about sort of new dialogue at this stage in the US?
Well, I think the discussions as with the economy in the market clearly went on polls in 2008 given the recovery and the return. We are very actively engaged right now in discussions. As you know, I have now moved to be in the states and to relocate it here. We are going to the process of meeting with consultants, meeting with the various institutions, are very pleased with what we are seeing, are having active and serious dialogues with a number of those and are optimistic that flows will resume and be strong.
As I mentioned before to Craig, my expectation is that the traditional or traditional related type mandates will be the first to arrive and it will be followed with more money into the alternative side. I think so far that’s what we are seeing more into traditional and smaller amount into alternative. I think that will assuming the world stay stable and our performance continues to be robust, this will accelerate quite quickly.
Your next question comes from Robert Lee from KBW. Please proceed.
Robert Lee - KBW
Real quickly, I am just curious on the past you had talked about willing to expand strategies, particularly I think credit arena was one place where you don’t have too much presence and I know you’ve talked about that in the past. If you maybe update us on those, is that some place given all the activity you are seeing there in distressed market that you are still focused on trying to expand into that or just any other new product initiatives?
I think that's sort of a watch this space sort of comment. We are hopeful that there will be something (inaudible).
Robert Lee - KBW
Going back to the SocGen acquisition, often times when you get a transaction just generally in the industry, you often do see some outflows that sometimes associated with the change in ownership to the extent that may be some assets that were kind of more tied to SocGen or something else. Is there any reason we should expect that over the near term, there will be some outflows related to just kind of the transaction or moving ownership?
I think we've largely seen what we expected to see and some of the outflows reflected our calling of certain accounts which we thought were not profitable enough. So I think that so far it's totally within our expectations.
Robert Lee - KBW
Can you give us a sense of where you stand on in the proportion of assets to maybe kind of having a shot at generating some performance fees? Are there above high water marks or approaching high water marks where there is a shot they can generate some fees second half of the year?
Yes. We have about $5.4 billion in AUM currently, add up about $14 billion of "performance fees" eligible AUM. So $5.4 is above or very close say within 1% or 2% of a poaching high water marks. As our performance continues to improve, then I expect that those amounts should improve accordingly.
Robert Lee - KBW
I know this is kind of a pretty generic statement. The balance of assets with performance fee components, deposit is kind of characterize, you are in aggregate kind of two-third to the way through getting back high water marks 50%, how should we just generally think of that?
I think there is a large number of accounts, but say in general they were more than two third of the way through on the balance.
And I don't think there will be an accelerator effect of performance, if we were to have had the same performance in the second half which I don’t expect. The performance fees would be much greater given the amounts that are already above the high water marks.
Robert Lee - KBW
One last question, kind of a modeling question. Just going through it, the cumulative dividends, it seems a lot higher than I would have expected. If that’s being impacted by the one-time gain on the extinguishment of debt and what not?
That’s exactly right, Robert.
Robert Lee - KBW
You mean if we kind of ex that out, what should we think, would that been around 1 or 2 million or?
Absent that, yes.
Robert Lee - KBW
Thanks a lot.
There are no further questions. I would like to thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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