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Executives

Noam Gottesman - Chairman & Co-Chief Executive Officer

Jeff Rojek - Chief Financial Officer

Michael Hodes - Director of Public Markets

Shirley Chan - Associate of Public Markets

Analysts

Steven - Barclays Capital

Craig Siegenthaler - Credit Suisse

GLG Partners Inc. (GLG) Q3 2009 Earnings Call November 5, 2009 8:30 AM ET

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2009 GLG Partners Inc. earnings conference call. My name is Ann and I will be your coordinator for today’s call. (Operator Instructions) At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Shirley Chan, Associate of Public Markets; please proceed.

Shirley Chan

Good morning, everyone and thank you for joining us for GLG’s third 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; and Michael Hodes, Director of Public Markets.

Earlier today, we issued a press release announcing our financial results for the third quarter of 2009. Following our prepared remarks on the quarter, we will open the call for Q-and-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 and 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 US GAAP, GLG presents certain financial measures such as adjusted net income, non-GAAP weighted average fully diluted shares adjusted and non-GAAP, adjusted net income and non-GAAP compensation, benefits and profit share which are not prepared in accordance with US GAAP.

A reconciliation of these non-GAAP financial measures to GAAP is provided in our Q3 earnings release. A copy of which is available on our Investor Relations website and has also been furnished with the SEC in our Form 8-K. GLG maintenance in IR website at www.glgpartners.com and we routinely posts important information on its for investors.

Effective on or after February 1, 2010, we intends to use our website as a means of disclosing material non-public information and for complying with its disclosure obligations under Reg FD promulgated by the SEC.

These material disclosures will be included on IR website under the recent news section of the overview page. Investors should monitor this portion of GLG’s website, in addition to following its press releases, SEC filings and public conference calls and webcast. Finally I’d like to mention that this is not intended to be an offer or solicitation for investment in GLG Partners Inc. or any particular GLG funds.

I’d turn the call over to Noam now for an overview of the quarter.

Noam Gottesman

Thank you, Shirley 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. On net AUM for the quarter to the $21.6 billion up $2.5 billion quarter-over-quarter and up $4.3 billion year-over-year, the gain in net AUM achieved during the quarter was primarily result of our ability to continue delivering strong risk adjusted investment returns for our clients.

Our alternative funds were up 10.2% for the third quarter, 24.6% for the first nine months of 2009 and 25.2% for the year-to-date through October. Our 130/30 funds were up 12.3% from the third quarter, 25.8% for the first nine months of 2009 and 24.5% for the year-to-date through October, up 5% to 6% better than the weighted-average benchmark for the year-to-date period.

Our long only offerings were up 12.8% for the third quarter, 31% for the first nine months of 2009 and 28% for the year-to-date period through October, 9 to 10 percentage points better than the weighted-average benchmark performances to the year-to-date periods.

Details on how these returns were calculated to be found in our press release issued today. Those are capital markets in economic environment remain uncertain with confidence the combination of our talented team of investment professionals and diversify international asset management platform will continue to serve our clients well. In fact, we have seen growing input in GLG from both existing and potential clients. Our organic net inflows turn positive in the third quarter following six months of stabilizing trends. Importantly, the redemption wave, the carpeted loss to unallocated behind us.

Further, though the timing in magnitude of this next inflow cycle remains difficult to calibrate. It is notable that we gain several significant new client relationships in the quarter, including among others a large sovereign wealth fund and a Fortune 100 corporate pension fund.

We’ve also received buy ranking from two prominent institutional consulting firms for global and international equity products, broadening our PO in the pension and endowment markets. The recent interest has been strongest for our managed account capabilities as well as our Japan and convertible debt fund offerings.

On the distribution side, we successful launched a UK retail offering leveraging the platform we acquired with our recent purchase of SocGen Asset Management UK. Additionally, we continue to build out our UCITS III offerings, which now include convertible emerging markets and throughout the strategies.

Our focuses is on developing long term client relationships, that build on our ability to deliver strong risk adjusted returns as well as our extensive international capabilities. We’re happy to report today, that in the third quarter of 2009, we had net inflow to roughly $600 million, before being partially offset by roughly $400 million of delayed outflows from the lifting suspensions on nearly all of our remaining funded that suspended redemptions.

These net inflows of roughly $200 million benefited from a particularly strong in showing September and compared favorably to net outflows of approximately $400 million in the second quarter of 2009 and net outflows of $2.2 billion in the third quarter of 2008.

I’ve also want to note that although we experienced a non-GAAP adjusted net loss this quarter $5.1 million or ratio of negative $0.02 a non-GAAP weighted average diluted share were well positioned from an operating leverage standpoint. Despite 2009 being a transitional year in many respect, we’ve strengthened our extensive multi-strategy platform in terms of product service and distribution and we have retained and added to our base of key investment professionals.

Importantly, new AUM plus performance driven AUM that we generate are likely to require little incremental fixed costs. We view 2009 as a transitional period, because our profile as a company and an investment managers, clearly are both substantial over the past year. One important byproduct to this evolution is that our AUM, at the moment it tilted more towards long early and managed account offerings, which carry lower fees relative to those found in our alternative funds.

The broadening of our platform is clearly a long term positive even though the shift in mix coupled with the high water marks we had exiting 2008 has compressed our margin this year. That said, we hit on new run rate for management and the administration field in the second quarter 2009, and we have reduced G&A by 23% since initiating a series of targeted expense cuts in the fourth quarter of 2008, despite acquiring SocGen Asset Management UK earlier in 2009.

Our current size in AUM mix, absent performance fees, which is the reality in the non-performance fee crystallizing quarter like the third quarter the first quarter, we should be roughly breakeven. Note that there was a modest earnings drag this quarter from the recently acquired SocGen Asset Management UK and the accounting for our convertible debts reduced the ratio of non-GAAP adjusted net income a non-GAAP weighted average shares by about a $0.01.

We expect that the substantial operating leverage should be continued to deliver strong investment returns and see net inflows resume. We will ultimately benefit from our infrastructure, which can accommodate a very substantial larger asset base with little incremental cost.

Notably, the outlook for performance fee at GLG has brightened significantly with our strong investment performance over the course of 2009. At the end of the third quarter, we had approximately $6.5 billion in AUM about water out of the potential $14.1 billion in performance the eligible AUM.

We had another $1.4 billion in AUM within 10% of their respective high water marks even so; we still have a lot of ground to cover on several particularly harden strategies last year, with approximately $3.9 billion in AUM, more than 30% below the respective high water marks. I want to underscore that we continue to be full about compensation given our current revenue levels.

We are working on increasing the value added from very compensation dollar we paid for stakeholders. Our philosophy remains performance driven even though we are covenants under the need to balance, but relatively lower management and administration fee yields generated by current mix of AUM.

In the fact that we enter 2009 which substantial high water marks, which breaks the link between investments performance and performance fee revenues. Year-to-date a compensation levels as measured by non-GAAP CBP are down 53% versus the prior year, but up modestly relative to revenues and I want to note will likely to see further upwards skew relative to revenues depending on how strongly which finish out this year.

We have been careful not to do anything with respect to our starting of compensation levels that could attract from how we are positioning of franchisee all long term great prospects. We have consciously waited the long term outlook in our decision making process and avoided potentially near term financially attractive, but ultimately myopic steps. We remain highly optimistic that our long term goals will be achieved to the benefit of our clients, personal and our shareholders.

In closing let me say again that we regard GLG as well position to deliver strong risk adjusted returns in the future given the depth of our investments team and our disciplined and focus approach to the markets. Further we strongly believe that we ultimately be a leading beneficiary as industry flows resume given our track record the breadth of our business are robust infrastructure at high level of transparency.

Now, let me pass you over to Jeff Rojek, our CFO, who will run through the financial results in a little more depth.

Jeff Rojek

Thanks Noam. I am going to provide some detail on the financial results for the quarter. Non-GAAP adjusted net loss was $5.1 million and the ratio of non-GAAP adjusted net loss to non-GAAP weighted average fully diluted shares was a negative $0.02. GAAP net loss attributable to common shareholders was $99 million or a loss $0.45 per share.

As we’ve previously disclosed under GAAP the company expects to recognize of 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 $110.1 million of acquisition-related compensation expense. Our total net AUM for the quarter instead at $21.6 billion which is up $2.5 billion sequentially and up $4.3 billion year-over-year.

As Noam mentioned in his opening statement, we were pleased with the progress we made in quarter three both in terms of performance and with flows. Specifically, we saw $1.9 billion of positive performance and roughly $200 million of net inflows, which is at or approximately $400 million in anticipated outflows from lifting the last materials suspensions on our remaining funds with suspended reductions.

There’s also roughly $400 million favorable impact from currency translation. On a year-over-year basis net AUM was up, as a result of approximately $200 million of positive performance. $3.3 billion in net inflows, which includes the incremental net AUM acquired from SocGen Asset Management UK, and $0.9 billion favorable impact from currency translation.

Our average net AUM was up 8% sequentially and basically flat year-over-year. From a revenue perspective, this was stable sequential trend in management and administration fee yields are roughly 90 basis points. Performance fees were relatively negotiable at $1.9 million, which is consistent with our practice of only recognizing performance fees when the crystallized, which is generally in June and December.

The same performance from the third quarter on above water AUM will generally be recognized in the fourth quarter, when the fees crystallized on December 31. Accordingly, the fourth quarter’s performance fees will largely reflect second half performance.

Significant revenue decline year-over-year, $48.2 million versus $102.1 million in quarter three 2008, it’s mostly AUM mix driven with management and admin fee yield down by roughly half, 90 basis points versus 192 basis points a year ago, on essentially flat average net AUM.

As we have detailed over the past several quarters, the mix of our asset based now had much stronger representation from long only fund to managed accounts, which yield lower fees in alternative strategies. The shift reflects the Q2 acquisition of long only asset management SocGen UK. Second half of 2008 heavy alternative strategy offers and strong management account inflows.

In the late 2008 transfer of private placement and other not readily realizable investments into special asset funds, which carry significantly reduced. Other income was largely captured the currency translation impact in non-dollar dominated cash in our balance sheet and currency hedging. It was $0.3 million in Q3 down $5.9 million sequentially on the narrowing of spread between the British pound and then US dollar over the three months, but up $3.1 million year-over-year due to the weakening of the US dollar over the 12 month period.

Looking ahead, our management admin fee yield should be reasonably steady with the mix of our net flows and investment performance driving changes at the margin.

We exited Q3 with a run rate in the 85 to 90 that range. In terms of the performance of the outlook, we continue to make progress relative to high water marks. At the end of September we had roughly $6.5 billion out of a possible $14.1 billion of performance fee eligible AUM at or above their respective high water marks.

Roughly $6.5 billion which was above water was split $3.1 billion in our alternative strategy, $2.3 billion in our 130/30 or similar strategies and $1.1 billion in long only strategies. Of the $7.6 billion in AUM under water, approximately $3.9 billion is alternative and $3.7 billion long only. 130/30 AUM is currently under water. $0.5 billion alternative AUM and $0.9 billion of long only AUM is 10% of their respective high water marks, while $3 billion alternative AUM and $0.9 billion of long only AUM is more than 30% below.

On the expense front, we continue to show expense discipline and further reduced general administrative cost in compensation in Q3. Internally, we view compensation using to measure non-GAAP compensation benefits of profit share or non-GAAP CBP, which reflects GAAP competition benefits in profit share adjusted to exclude acquisition related compensation expense in connection with the reverse merger Freedom.

Third quarter 2009; non-GAAP CBP dropped 33% from the year ago period to $26.5 million due to lower employee compensation in benefits as well as lower discretionary bonus accruals in profit share. Non-GAAP CBP as a percentage of net revenues in other income, grow 16 percentage points to 55% for the third quarter, compared to the year ago period.

Viewed in context of the first nine months of 2009, non-GAAP CBP dropped 53% from the year ago period to $89.5 million, but rose three percentage points. The 48% add the percent of net revenues in other income. In addition, restructuring cost tied to the acquisition of the SocGen Asset Management UK added $3.3 million to the non-GAAP CBP for the first nine months of 2009 or 1.8% of the percentage of net revenues in other income.

The higher non-GAAP CBP to revenue ratios in 2009, when compared to 2008, reflects stronger investment performance broadly, a lower percentage of total net AUM in a position to generate performance fees and lower management and admin fee yields. While compensation benefits in profit share has large discretionary components and its finalized days primarily on full year performance at December 31 of each year. The strong investment performance coupled with this year’s revenue dynamics or putting upward pressure on the ratio relative to Q3s 55% level, as we think about the full year.

In terms of non-compensation related expenses, despite the addition of expense from the operation acquired from SocGen Asset Management UK. Our third quarter 2009 general, admin and other expenses decreased 7% sequentially and 22% from the year ago quarter. These declines are result of measures we instituted across the firm beginning in quarter four, 2008.

Non-compensation related acquisition and restructuring costs prior to SocGen Asset Management UK added $0.1 million and $0.9 million to the G&A line in the third quarter and the first nine of 2009 respectively. Lower net interest expenses of $2.9 million versus $4 million a year ago is due to lower dept balances. Lower LIBOR rate related to our term loan above as well as the amortization of deferred gain with respect to our second quarter debt restructuring.

On the tax front, we reported on a non-GAAP adjusted net loss basis and effective tax rate of 11.9% for quarter three, 2009 versus 23.2% of the same period last year, bringing the effective rate for the first nine months of 2009 to 14.1% versus 23.6% for the same period a year ago.

Below non-GAAP effective tax rate for quarter three, 2009 was influence largely by the pre-tax loss for the quarter. The reduction in the effective tax rate for the nine month period is a result of the tax treatment of quarter two gain arising on the distinguishment of dept, which is also the reason behind our current expectation, that the full year 2009 effective rate was lower than the 20% to 25% range we expected coming into 2009, that said we expected second half of 2009 effective rate before within the 20% to 25% range.

With respect to our GLG UK for the former SocGen Asset Management UK business, the integration is now essentially completes and we incurred as expected a modest pre-tax operating loss related to that business in quarter three 2009. We expect the business to begin, being a creative by the end of this year last nine months from the date of our purchase.

We remaining encouraged by the progress being achieved in the administration of Lehman Brothers International Europe despite the recent well publicize rejection of the scheme of agreement in the UK course. A great deal of information is now becoming available, which as reaffirm to stands we have taken to respect of the evaluation to our funds.

Now we continue to devote a significant amount of time and attention to reaching a satisfactory resolution to these issues for our clients. Before I open the call for questions, I want to mention that we’ve updated our investor presentation, which is available on our website, www.glgpartners.com and has been included in our Form 8-K filed today with the SEC.

Operator, can you open up the Q-and-A session, please.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from the line of Roger Freeman with Barclays Capital; please proceed.

Steven - Barclays Capital

Hi, good morning. It’s Steven here for Roger. I’m wondering if you could talk a little bit more about the nature of these inflows. Are you seeing risk appetite coming back and in particular, can you talk about what’s going on in the U.S. and broader trends you’re seeing in terms of institutional versus high net flows? Thank you.

Noam Gottesman

Yes, thank you, Steve. We’re definitely seeing a risk appetite comeback. I would say that, we’re beginning to see the inflows back, but I would say that the level of meetings and duty that we’re in is roughly up 10 folds in the last quarter. Really very, very busy and busy across more strategies about highlight in particular.

Our European Long-Short, are emerging market offerings, and convertible and credit related, but it’s mainly, I would say, more heavily long-short in emerging markets. We are seeing interest from institutions from private banks. We’re seeing still very little from the high network community. It’s definitely more institutional.

Vis-a-vis the U.S., again very pleased with what you’re seeing a highlight that we received with some buy ratings from consultants, which is a critical component we have learnt of getting money from the U.S., that third party validation is very important. We have done well. We are pleased with the progress. We are having meetings as we mentioned and highlighted one of the new clients that we have is a Fortune 100 clients. It’s a very good mandate. It’s going better than I could have hoped a quarter ago.

Steven - Barclays Capital

That sounds great and what about in terms of sovereign wealth fund?

Noam Gottesman

We gained a new one, a large new mandate, which we didn’t have before. We continue to work with all the others that we had before and we’re continuing to see inflows pretty much across the board.

Steven - Barclays Capital

Okay, and can you talk about the nature of the, to say pipeline of inflows? I mean, it sounds like things are going well and when do you expect to have even more meaningful inflows coming and going forward?

Jeff Rojek

I think it’s very hard to forecast. We were very pleased with the third quarter, as we’d highlighted in our second quarter, though we expected to see roughly $4 million to $5 million of outflows in connection to the final new lifting of suspended fund that we had and so clearly we had very significant inflows through September, that trend appears to be continuing.

It’s hard to really pin down and calibrate exactly when the money comes in, because the lag between being told that you gotten something and the money are raising, but it’s definitely going in the right direction for us as a whole and I presume to the industry also.

Steven - Barclays Capital

Great, and in terms of what’s been guided or site pocketed. Can you give us any update on that as well, please?

Jeff Rojek

Yes. As of the 30, September, total growth AUM with suspended redemptions amounted to only $279 million, that down very significantly and total asset and special asset vehicles amounted to $1.1 billion.

Steven - Barclays Capital

Okay and then last question, just to kind of switch gears. Can you talk about expense levels going into the fourth quarter particularly it relates to compensation? Are you thinking about year end bonuses? That’s it.

Jeff Rojek

So we believe in paying for performance and last year performance was down and so with our component adjusted basis and it come to revenue to fell to 40% from 45% the year before and in absolute term they declined by 66%. The comparison in 2009 is the bit skewed, because the complexion of revenues is difference and the present of high water marks is impacting the link between revenues and investment performance.

In the first nine months of 2009 comp to revenue rose slightly to 48% from 45% in year ago period and comp was actually down 53% year-over-year, but I think full year performance as of the end of the year, will drive the ultimate level, but this year’s strong investment performance and the revenue dynamics are putting up with pressure in the comp to revenue ratio, which is at 55% currently and that’s probably going to be more indicative of where we could be for the full year.

Steven - Barclays Capital

Okay, great. Thank you.

Operator

The next question comes from the line of Craig Siegenthaler with Credit Suisse; please proceed.

Craig Siegenthaler - Credit Suisse

Thanks and good morning. Just wanting your answers to the last set of questions [Inaudible]. I believe all three of those are higher fee products. Can you comment on probably, where this consolidated fee rates should trend. It’s been under pressure for the last few years. I’m just wondering, if that could that have a little bit of relief given them in those products?

Noam Gottesman

I mean, to be frank, we’re not seeing any pressure on the alternative fee rates, where with the reason we’ve had to decline is just had a substantial shift from being predominantly alternative to being more long early in 130/30 than alternatives. The flows we’re seeing are strong in both areas. The biggest tickets have been in the long early and the 130 level, but we’re seeing absolutely no fee pressure to all on the alternative products.

Craig Siegenthaler - Credit Suisse

Noam, what I was trying to address was, those three products, with European Long-Short, I thought an alternative fees to it. So I was wondering if higher amount in those three products could shift that product mix backed with alternatives.

Noam Gottesman

I would certainly hope, so and that’s our goal.

Craig Siegenthaler - Credit Suisse

Okay and then just trying to affect the kind of net flow momentum. How is in momentum and inflow momentum, and RP activity heading into let’s just say the last 30-60 days and also should we expect any large redemptions in the fourth quarter associated with additional gates being done with that?

Noam Gottesman

No, on the last question, no, we might have redemptions, but nothing to do with any lifting of gates, when people come in and when people to trying exit, but we have nothing at all on the horizon. As I mentioned, interest is extraordinarily and positive across all products really and product lines. When that ultimately translates into the accounts being funded, it’s hard to pin down, but as you can see from the third quarter it’s starting to happen.

Craig Siegenthaler - Credit Suisse

Got it and then just one last question FAS 157, it looks like there’s some progress being made yesterday with respect to the asset management, especially alternatives, any impact or any thoughts on that heading into next year, or in terms of how that P&Ls being reported?

Jeff Rojek

I mean, 167 Craig, correct?

Craig Siegenthaler - Credit Suisse

Yes.

Jeff Rojek

Okay, we’ve tracking that a lot and what we’ve done is, we done an internal scoping project to see what the impact is and we’re tracking with the FASB doing closely. So I’m optimistic that will get a favorable outcome from that FASB project, but we’re planning internally that if that doesn’t happen, that will be in a position to comply from 167.

Craig Siegenthaler - Credit Suisse

Great, thanks for taking my questions.

Jeff Rojek

Okay.

Operator

Ladies and gentlemen, this concludes today’s question-and-answer session. We would like to thank you for you participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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Source: GLG Partners Inc. Q3 2009 Earnings Call Transcript
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