TD Holdings, Inc.
Q1 2009 Earnings Call Transcript

Published: 12 May 2009

[Operator:]

Good day, ladies and gentlemen and welcome to the first quarter 2009 GLG Partners, Incorporated earnings conference call. Mt name is Towanda and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Shirley Chan, Associate of Public Markets.

[Shirley Chan:]

Thank you for joining us for our first 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 today, we issued a press release announcing our financial results for the first quarter of 2009. After our prepared remarks during this call, we would be happy to take questions. 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 they 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 earned 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. GLG is providing these non-GAAP financial measures to enable investors, securities analysts and other interested parties to perform additional financial analysis of GLG’s personnel related costs and its earnings from operations, and also because GLG believes that they will be helpful to investors in understanding all components of the personnel-related cost of the business. 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 is also bean furnished this afternoon with the SEC in our Form 8-K. Finally, I would like to point out that this is not intended to be an offer or solicitation for investment in GLG Partners Inc. or any particular GLG fund. I’ll now hand the call over to Noam for an overview of the quarter.

[Noam Gottesman:]

We are pleased to have the opportunity to speak with you today, and provide an update on our first quarter 2009 results and the performance across our funds. In short, we’re off to a strong start in 2009 and continue to believe that the current environment presents excellent opportunities to generate returns for our clients, who are our primary focus at GLG. Our first quarter performance for our hedge fund was positive 4.4% and for our long-only funds was negative 6.8%. Given the sharp decline experienced by the global equity market of the same period, we were pleased to see many of our alternative strategy funds return to positive territory. The strong showing continued in April, bringing the estimated year-to-date performance through April to 6.1% for our hedge funds and positive 1.3% for our long-only funds. Performance is calculated in a dollar weighted average basis, as the composite performance of all the constituent funds, excluding managed accounts, fund to funds, the GLG emerging market special situation funds, the special asset funds and dragon funds and the SocGen asset managed UK funds. From a fun float standpoint, we are seeing signs of stabilization with net flows at a positive $50 million in the first quarter and believe that the redemption cycle has likely started to slow more broadly. Moreover, we are optimistic looking ahead given the pipeline that exists today and the traction that is building with the highly regarded teams we brought in last year to lead our emerging markets, macro and special situations platform. Though it may take some time before capital inflows become meaningful against the industry, we believe that we will be an early beneficiary because of our long term record, high level of transparency and our multi-strategy business model. Strategically, we have taken several important steps in recent months. On April 3, we successfully completed the acquisition of Societe Generale Asset Management UK, a UK-based long-only asset manager with approximately $6.8 billion in AUM as of the 31 of March 2009. As many of you know, we began life by offering both traditional and alternative strategies, and we will continue to develop as a multi-strategy firm. We strongly believe that the flexibility afforded to multi-strategy firms like ours gives the ability to be ambidextrous. This allows us to offer choices and structure more closely tailored to each investor’s needs. We are increasingly using our robust infrastructure, which encompasses a strong operational and compliance-related controls, as well as transparency to our investor clients as a differentiator. We’re among the most transparent asset managers in our sector with our independent custodians, multiple prime brokers, first class customer statements, U.S. public listing and our regulatory oversight from the SSA and the SEC. 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 28% from the fourth quarter, following a series of targeted cuts and contract renegotiations with various suppliers, and we remain disciplined on compensation. We are committed to managing our expenses with an eye towards the economics of the business. We have significantly increased our financial flexibility by reaching an agreement to amend our credit agreement, to eliminate the financial covenants and agreeing to purchase at least $150 million of senior loans at 60% of par value. As of this afternoon, approximately $285 million faced value of senior loans, have been submitted for purchase at 60% of par value. The amendment is conditioned on us raising at least $150 million fresh capital. You are likely aware, by now that we issued a separate press release today announcing a proposed financing transaction. SEC rules on this type of transaction are strict and will prevent us from discussing this transaction publicly or answering questions you may have. We ask for your understanding. Now let me pass over to Jeff Rojek, our CFO who’ll cover the financial results, the SocGen acquisition and the amended credit agreement in a little more depth.

[Jeff Rojek:]

I’m going to provide some details on what I believe are the highlights for the quarter. Non-GAAP adjusted net income was $5.3 million or $0.02 per non-GAAP weighted average fully diluted share and our GAAP net loss attributable to common shareholders was $120.3 million. As we’ve previously disclosed, under GAAP accounting the company expects to recognize for the next several 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 $126.7 million of acquisition related compensation expense. From a revenue perspective, we saw a significant decline year-over-year, $51.7 million versus $131.4 million a year ago. This decline is attributable to two main factors. Our average net AUM fell 41% year-over-year and 10% sequentially in first quarter 2009. Specifically, our net AUM for the quarter stood at $14 billion, down $1 billion from year end and $10.6 billion year-over-year. Performance related declines and the impact of foreign exchange translation in the first quarter of 2009 reduced net AUM by $807 million and $251 million respectively, while inflows were positive at $50 million reflecting managed account growth. The mix of our AUM has evolved substantially since last fall as we shifted towards the broader based investment platform with greater representation from managed accounts and long-only funds, while the weighting of some of our higher yielding AUM has declined. Further, as private placement and other not readily realizable investments were transferred into special asset vehicles late last year, the management fees charged on these designated funds were materially reduced. Our management administration fee yield was 139 basis points in first quarter of 2009, versus 157 basis points in the fourth quarter of 2008. Both were adjusted to exclude the SocGen Asset Management UK sub-advisory mandate and were 197 basis points for reference in the first quarter of 2008. The performance fees comparison for the first quarter was positive, showing a $6.1 million increase from the year-ago period to $10.8 million. Its GLG’s policy to recognize performance fees when they crystallize, this is generally on June 30 and December 31 of each year. The performance fees in the first quarter of 2009 came from GLG’s managed account platform. Sustained performance from the first quarter above high water AUM will generally be recognized in the second quarter when the fees crystallize on June 30. On the expense front, we’ve been actively reducing and monitoring our general and administration cost base as well as compensation benefits and profit share levels. Internally, we view compensation using the measured non-GAAP compensation benefits and profit share or non-GAAP CBP, which reflects GAAP compensation benefits and partner profit share adjusted to exclude the acquisition related compensation expense in connection with the reverse acquisition transaction with Freedom. First quarter 2009 non-GAAP CBP dropped 62% from the year-ago period to $19.9 million due to lower employee compensation and benefits, as well as lower discretionary bonus accruals and limited partner profit share. A bi-product of lower AUM levels and a head count reduction implemented during the fourth quarter of 2008. Non-GAAP CBP as a percentage of net revenues fell 2 percentage points to 39% for the first quarter 2009, when compared to the year-ago period. Note that compensation benefits and profit share can have largely discretionary components, and is based primarily on our full-year performance as of December 31 of each year. In terms of non-compensation related expenses; our first quarter of 2009 general administrative and other expenses decreased 28% from last quarter to $22.3 million, mainly due to our targeted initiatives to better align expenses with our current AUM levels. Further, a realized loss on available for sale investments of $21.2 million was recorded in the first quarter of 2009, representing investments that had been made in our funds on behalf of participants in the equity participation plan. These investments are consolidated on GLG’s balance sheet under GAAP, but are excluded from the calculation of non-GAAP adjusted net income, as the gains or losses on these investments ultimately flow entirely to the participants in the plan. On the tax front and on non-GAAP adjusted net income basis, the effective rate of tax for the first quarter of 2009 was level with the same period last year at 23%. We maintain our previous guidance range of 20% to 25% through 2009. Our acquisition of Societe Generale Asset Management UK was completed on April 3, 2009. SocGen Asset Management UK had approximately $6.8 billion dollars in assets under management as of March 31, 2009, bringing our pro forma net AUM to $18.1 billion, reflecting approximately $4 billion of incremental assets under management, and the $2.8 billion in assets that had been managed on an interim sub-advisory basis by GLG for SocGen Asset Management UK. The initial phases of this integration have gone extremely well. As a reminder, we paid $4.5 million pounds, which is approximately $6.5 million U.S. dollars in cash to purchase SocGen Asset Management UK. We continue to expect the transactions to be mildly accretive on an operating basis this year. For those of you building models, Societe Generale Asset Management UK’s first quarter revenues were $6.8 million U.S. dollars. On Lehman Brothers, I want to briefly mention that we continue to work out the issues regarding our fund’s exposure to the administration of LBIE. Progress is being made and we will concentrate our efforts and keep pushing on behalf of our fund investors. Overall, exposures remain less than 1% of our AUM. As Noam mentioned, we have amended our credit agreement. The amendment is conditioned on us raising at least $150 million in fresh capital. We issued a separate press release today and asking for a proposed financing transaction. As Noam mentioned, SEC rules on this type of the transaction are strict and will prevent us from discussing this transaction or answering questions that you may have at this time. Upon the amendment to our credit agreement becoming effective, the financial covenants and the original credit agreement will be eliminated. In addition to the elimination of the financial covenants, as part of the negotiation with the lenders, we agreed to modify certain terms of its existing loans. The interest rate will be reset to LIBOR plus 2.5% and GLG has agreed to additional limitations on the use of free cash. GLG has also agreed to restrict the payment dividends for a period of one year and thereafter, unless the remaining principal loan amount with its senior lenders is less than $200 million. The text of the amendment is being filed on Form 8-K with the SEC today. We expect to repurchase approximately $285 million and outstanding principal amount of loans have been submitted for purchase to the company at a price of $600 per $1,000 in outstanding principal amounts. The thought process behind our decision to amend our credit agreement is simple. We see a lot of opportunities to grow our franchise and believe greater financial flexibility is a positive in an uncertain economic environment. Before I turn the call back to Noam for some closing comments, I want to highlight that we have updated our investor presentation, and it is available on our website www.glgpartners.com and has also been filed today with the SEC in our Form 8-K.

[Noam Gottesman:]

Thanks Jeff. Last quarter, I ended my prepared remarks with a few goals. Chief among those was the ambition to improve our fund’s performance and to further integrate our traditional and alternative strategies, as we believe that having both benefits our clients in much the same way as offering multiple alternative strategies. In terms of our fund’s performance, the first four months have been very satisfactory. We have generally had low gross and net exposures, and have done very well through our Alpha generation, as is evidenced from the performance of our long-only funds, which have been fully invested. Of note within our alternative platform, our European group which includes our European long-short fund and Alpha select fund are convertible franchise which includes the market mutual fund and our convertible fund; our sector oriented funds which include our global mining and technology strategies, as well as our North American products have performed very strongly. I mentioned our traditional funds before, but specifically wanted to highlight the exceptional performance of Steve Harker, who joined us with the acquisition of SocGen Asset Management UK in early April. His Japan [Equities] strategies performed particularly well this year in addition to over the past few years. With regard to our second goal, to further the integration and growth of our alternative traditional strategies, we are not surprisingly seeing the bulk of our new flows into traditional strategies. We like our prospects in that arena, as well as within our alternatives. During the last nine months, the viability and need of alternative investment managers has often been questioned. Within this context, I wanted to highlight that $100 invested in the S&P 500, 10 years ago would be worth approximately $74 through the end of March, and $100 invested in the Morgan Stanley world index would be worth approximately $76 for the same period, including dividends. However, if you invested at the same $100 in our dollar weighted average composite of our hedge funds 10 years ago, on March 31 you could have had in your pocket approximately $278. In other words, while the S&P 500 and MSCI world index have seen a negative compound annual return of approximately 3% over the last 10 years, GLG’s hedge funds surpassed both industries by generating a positive 11% compound annual return. We remain committed to continue retaining and attracting the top investment talent in our industry, as well as advancing our plan to develop new strategies that we feel offers new potential. We believe that large multi-strategy platforms with well developed infrastructures and transparency will be the biggest beneficiaries for the natural selection process. GLG aims to be at the forefront of this trend.

[Operator:]

(Operator Instructions) Your first question comes from Roger Freeman - Barclays Capital.

[Roger Freeman:]

First of all, can you just run through on the components of the return? It looked like on an aggregate basis, I think the return is negative for the quarter, but there is a number of items that you called out, including the SocGen funds and some of the separately managed accounts and etc. Can you just sort of walk through the delta between that, and I guess the 1.5% blended return you’re showing for all the funds?

[Noam Gottesman:]

You talking about, performance of the funds?

[Roger Freeman:]

Yes.

[Noam Gottesman:]

So I’ve broken it up in two categories. Year-to-date performance for our hedge funds through April is a positive 6.1% and year to date through April a positive 1.3% for our long-only funds.

[Roger Freeman:]

I think in terms of your total return across the entire AUM was negative in the first quarter, am I right, if I read the release correctly. That’s what I was trying to bridge back to, I think --.

[Mike Hodes:]

Just interims of the return, we have a composite of both alternatives, which were generally up and long-only, which while down generally outperform us. One of our long-only strategies beat their benchmark. We do have a mix of assets; on a blended basis we did see a performance decline. That’s what I think you’re referring to on the table and that’s how the map, I’ll fill any gaps that you might have, offline.

[Roger Freeman:]

I guess, can you talk a little bit about the flow prospects, as you look at them between sort of your traditional high net worth client base and institutions, where are you seeing sort of the most interest, and then particularly within the U.S., as you have been stepping up efforts there to attract new floes. How are those looking, as some of the large U.S. institutions look to sort of rethink there alternative allocations, maybe in the second half of the year?

[Noam Gottesman:]

Obviously, I think the high net worth part of the market was the one that retrenched most during 2008 and I think that most high net worth people in sort of November period were just praying that their banks would still be in business. By January, they were many of the banks that had received government support or it was implicit government support and they were no longer concerned about the institution and they didn’t care if they were earning nothing on their money. They just wanted to make sure that it was safe and it wasn’t losing. Now, cash is beginning to feel somewhat more expensive to them to hold, and so we are beginning to have conversations again, we are seeing [flows], money is being discussed, but I think it is going to take them quite frankly, a couple of quarters to feel comfortable to step back into the water in any meaningful way. Institutions, actually we are seeing good flows and strong interest. I would say in particular, out of the U.S. market, where people were generally underrepresented before and they are looking at the modified traditional assets that we manage, as well as alternatives and that is pretty broad. On the European side, the flows we’ve seen have tended to be on the institutional side have been more towards the traditional strategies we have or-be-it those with performance fees. I think the major changes that we have probably seen from having been an equal 50/50 between high net worth and institutional split. We now are 60% institutional and about 40% high net worth.

[Roger Freeman:]

Then, I guess the lastly and then I’ll jump back in the queue. I guess around the SocGen business, can you talk, I guess about a couple things. One is the sort of final AUM you took on, how much that came down due to outflows or money that didn’t come over to you, versus just the decline in the market value versus, I guess the $8 billion versus the AUM that you had originally announced, and then I guess how good you feel about those funds that have come over. I guess also as we think about the expense structure, what percentage of the employees you’ve kept or how have integrated them into other funds that are run by existing employees.

[Noam Gottesman:]

I think in terms of SocGen, we are pretty much exactly where we thought we would be in terms of the assets. We expected some redemption, we expected some subscriptions and we were pretty much where we thought we would be on that side. The reduction comes mainly from a combination of two things. One, the markets were down and while the fund performed better than the industries in many places, that would still mean that you are down 10 as opposed to 15, for instance. The other thing is that most of the assets are denominated in pounds, and the pound weakened quite strongly against the dollar and so that led to a currency differential. The integration is going extremely well and it is ongoing.

[Jeff Rojek:]

In terms of adding to that, your question about personnel. The way to look at it is that we said there’s about $6.8 million revenues, in terms of on a modeling basis, on an expense side it’s about the same and we are going through an extensive sort of strategic re-look at the entire business, looking at it integrated within GLG and then right sizing that business, as we go forward. Like we mentioned we expect that to be, post that restructuring exercise to be mildly accretive for the period.

[Roger Freeman:]

So you’re basically saying it’s roughly break-even for the quarter?

[Jeff Rojek:]

For the quarter, yes.

[Operator:]

Your next question comes from Craig Siegenthaler - Credit Suisse.

[Craig Siegenthaler:]

First question on the management fee rate, I understand why you backed-up the SocGen mandate, but I’m just thinking over into the second quarter and with the full 8 billion of AUM from SocGen going back into your asset base. How can we think about the delta in the fee rate, the management fee rate sequentially in the second quarter versus what you produced this quarter?

[Jeff Rojek:]

So at the end of Q1, we were at 1.39% on a combined management and admin fee basis. We’ll add approximately $6.8 billion of Societe Generale Asset Management business that is long-only type business. So that fee structure is in terms of traditional long-only type management fees. So, we’d expect, because of the weighted average impact of that AUM coming in that the management and admin fee yield will move downwards from 1.39% that we had this quarter.

[Craig Siegenthaler:]

Then, second question. I guess more of a flow outlook, when you think about the macro and emerging market strategies which you added some individuals to your teams last year, I’m just wondering how you think these strategies are positioned to win business this year or next year and when you had to weight it, do you think there’s a better opportunity to win flows over the next few quarters or do you think it’s going to be a little bit longer than that?

[Noam Gottesman:]

I think its two distinct groups; the first part was the group that took over our existing emerging market funds, which is headed by [Turtle Boom] and [inaudible]. They started managing money in October, they’ve really done very well every month since then and have delivered excellent returns and we are now having a lot of interest and seeing flows into those funds. I think that will build over time, but we are sort of six or seven months into their performance and it has been very, very, very satisfactory. The other group is launching new products, which is a special situation fund and a macro fund. They have also started and we are very happy with the returns in the macro funds to date, we’ve gotten new money into that, we think that will ramp up relatively quickly. The special situations funds is going to take a little bit longer, but I would expect both of those product lines to deliver good inflows in the third and fourth quarter and if performance is good, I think it will obviously continue, but this isn’t something that we are expecting to take a year or so before we get money in, its already started and I’d expect it to incrementally grow over the quarter.

[Operator:]

Your next question comes from Robert Lee - KBW.

[Robert Lee:]

Just a couple questions. First at the Pendragon, I think that’s the name; that stated to occur in second quarter and maybe update us on the assets you think could come over with that?

[Jeff Rojek:]

The Pendragon happened. They are in the office working hard, fully integrated. We are expected roughly $300 million dollars of assets to come over and they have and we’re very pleased with them. In fact, we are working on launching a new fund dedicated to this team and we’re in the process of that, but it has been an excellent integration, they are working well with the teams in London and in New York.

[Robert Lee:]

Now, did they come over after earlier this quarter or was that included in Q1?

[Jeff Rojek:]

It was from March 1.

[Robert Lee:]

Can you also maybe just update us on where we stand with the assets that do have high water marks at this point, maybe if possible kind of size it and maybe average size of existing high water marks?

[Jeff Rojek:]

Sure. The high water marks are featured in the incentive structure and although a large number of funds are still presently under water, we are making good progress. Totally AUM eligible, the performance fees is approximately $11.5 billion. We have about 34% of that or $3.9 billion currently above the high water mark and an additional 12% or $1.4 billion within some 8% over high water mark. So, roughly 46% or $5.3 billion is above or within the spitting distance of that.

[Robert Lee:]

I’m just curious, you mentioned that the [inaudible] came from the managed accounts and that is also where you source some of the inflows, the mass inflows in the quarter. Is that coming predominantly from the 13030 product that you -- the $1.3 billion or so that you have with the Italian bank?

[Jeff Rojek:]

It was a $1.6 billion and that’s been a positive contributor on the 13030, but it’s not exclusive, we think flowed both into that and into the other strategies, too. Managed accounts, I think are going to be an increasing feature of the industry and I think it’s a logical evolution. Many participants will not be able to do this operationally, unfortunately we are very well positioned for this and I think we are seeing it in result and inflows in the quarter where almost all our peers had outflows.

[Operator:]

Your final question comes from [Andrew Bruther] with Citigroup.

[Andrew Bruther:]

Can you briefly discuss any changes to your outlook on M&A opportunities and why they are rework your capital structure?

[Jeff Rojek:]

I think that we have said that we would be opportunistic and when we see things that are of great interest, we will look at them seriously and I think that holds true.

[Operator:]

Ladies and gentlemen, with no more questions in the queue, I will turn the call over to Noam Gottesman.

[Noam Gottesman:]

Thank you very much for joining. This concludes our first quarter call and on behalf of all of us at GLG, I thank you for participating.

[Operator:]

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a wonderful day