TD Holdings, Inc.
Q3 2008 Earnings Call Transcript

Published: 10 Nov 2008

[Operator:]

Good day ladies and gentlemen and welcome to the third quarter 2008 GLG Partners, Inc. earnings conference call. My name is Madge and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today Miss Shirley Chan, Associate of Investor Relations. Please proceed.

[Shirley Chan:]

Hello everyone and thank you for joining us for our third quarter investor and analysts 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 [inaudible] announcing our financial results for the third quarter of 2008. After our prepared remarks during this call we’ll be happy to take your questions. I’d 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 income 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 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, security analysts and other interested parties to perform additional financial analysis of the company’s personnel related costs and its earnings from operations, and because it believes that they will be helpful to investors in understanding all components of the personnel related costs 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 has also been furnished this morning to the SEC on our Form 8-K. Finally I’d like to point out that this is not intended to be an offer or solicitation for investment in any particular GLG fund. I will now hand the call over to Noam for an overview of the quarter.

[Noam Gottesman:]

Thank you Shirley. We are pleased to have the opportunity to speak with you today and provide an update on our third quarter results and the performance across our funds. Our financial metrics were as follows. Our net AUM for the quarter stood at $17.3 billion, down $6.4 billion for the quarter and $3.2 billion year-over-year. Roughly half of the AUM decline in the quarter was negative performance with the remainder nearly equally split between the expected outflows in EM of $1.3 billion, outflows from our other funds of $0.9 billion and the impact of currency translation which amounted to $1.1 billion. I want to note that these numbers do not reflect the previously announced Banca Fideuram mandate which funded in October and added roughly $1.6 billion in net AUM. As to our performance, on the dollar weighted basis in the third quarter we averaged a net decrease of 13.6% across all our funds and a net decrease of 12.8% for our hedge funds. For the first nine months on the dollar weighted basis we averaged a net decrease in performance of 18.2% across all our funds and a net decrease of 16.5% for our hedge funds. These numbers compared to declines through September of 24% for the MSCI World, 21% for the Merrill Lynch Global Convertible Index, 30% Morgan Stanley European Index and 21% for the S&P 500. Non-GAAP adjusted net income was $21.8 million for the third quarter or $0.07 for non-GAAP weighted fully diluted share. These metrics are down year-over-year on flat revenues as lower comp expense levels were offset by higher G&A and interest costs associated with the debt taken on in the fourth quarter of 2007. Lastly, in terms of results I want to note our third quarter 2008 GAAP net income, attributable to common stockholders was a loss of $167.1 million. As we have previously disclosed under GAAP accounting the company expects to recognize for the next several years significant and largely non-cash compensation related expenses associated with GLG’s November of 2007 reverse acquisition transaction with Freedom Acquisition Holdings. In the third quarter of 2008 the GAAP net loss resulted primarily from the recognition of these acquisition related compensation expenses, which reduced GAAP net income by $187.5 million. Now let me pass over to Jeff Rojek our CFO who will cover the financial results in a little more depth.

[Jeffrey Rojek:]

Thanks Noam. I’m going to provide some details on what I believe are the key highlights to the quarter. From a revenue perspective, since we generally only crystallize performance fees in the second quarter and in the fourth quarter, our Quarter 3 revenues largely reflect our management and admin fee rates and average net AUM levels. Our total Quarter 3 net revenues and other income came in at $102.1 million, down fractionally from the year ago period. Our average net AUM Quarter 3 2008 was $20.5 billion versus $24.2 billion in Quarter 2 2008 and $19.5 billion in the third quarter of ’07. Noam already detailed the factors impacting Quarter 3 AUM and a full reconciliation is provided in Table 1 of the press release that we issued this morning. Our management and admin fee rates for this quarter were 1.92% up 8 basis points versus the second quarter of 2008 and down 3 basis points versus the third quarter of 2007. Though we generally don’t crystallize performance fees in Quarter 3, we did see about $6.8 million of performance fees in the third quarter, primarily reflecting the crystallization of performance fees related to certain managed accounts. I do also want to note that we are seeing some pressure from a strengthening dollar and this is reflected in the negative $2.8 million of other income for the third quarter of ’08 which relates mainly to currency translation losses on the cash held on our balance sheet. Additionally, since roughly 45% of our assets under management is in share class has been nominated in currencies other than the dollar, currency fluctuations can impact our fees and do affect our AUM levels. When the dollar strengthens, our assets under management when translated into dollars declines. The rough math is a 10% increase in the dollar equates to a 4 to 5% decline in our AUM, all else being equal. Dollar strengthening reduced reported net AUM by $1.1 billion in third quarter and the pressure continued into October. We’ve been breaking out this impact in our press release and in our public filings. To mitigate the related impact on our earnings, a series of foreign exchange contracts were put in place in June of 2008 to hedge a portion of our euro denominated management fee and performance fee revenue stream. On the expense front, I want to address how we are approaching compensation levels in the current environment. Internally we view compensation using the measure non-GAAP compensation benefits in profit share or non-GAAP CBP, which reflects GAAP compensation, benefits and partner profit share adjusted to exclude acquisition related compensation expense in connection with the reverse acquisition transaction with Freedom. In the third quarter of 2008 non-GAAP CBP dropped 14.3% to $39.4 million, largely due to lower discretionary bonus accruals and limited partner profit share. Non-GAAP CBP for the first nine months of 2008 dropped by 40.7% to $188.6 million also due to lower discretionary bonus accruals and limited partner profit share. Non-GAAP CBP as a percentage of net revenues was 38.6% for the third quarter of 2008 versus 44.8% for the year ago period. This brings this year’s nine month, non-GAAP CBP to revenue ratio to 44.7% versus 53.6% for the same nine month period last year. Since most of our compensation is discretionary and performance levels have been disappointing, not surprisingly we have moved compensation accrual levels down. Though we do not plan to give specific guidance on compensation looking forward, if current trends persist it is reasonable to assume that the comp to revenue ratio may fall further. In terms of G&A we were at $30.3 million in the third quarter of 2008 which is up 17% versus the same quarter last year and relatively flat from the last quarter. Increases in G&A from a year ago are largely a result of additional public company costs and growth in the scale of our business. On the tax front, on a non-GAAP adjusted net income basis the effective rate of tax for third quarter 2008 was 23.2% versus 14% to the same period last year and 23.6% in the first nine months of 2008 versus 16.5% in the year ago period. We expect to remain within our previous guidance of 20 to 25% in the fourth quarter of 2008. Lastly, in terms of capital deployment, we paid a $0.025 quarterly dividend for Quarter 3 but opted not to repurchase any shares or warrants this period. Going forward the board of directors will consider paying a special dividend based on annual profitability. We continue to have approximately $117 million available under a stock and warrant repurchase program through February 4 of 2009. Our approach to capital deployment remains flexible and opportunistic. Before I turn the call back to Noam for some additional comments, I want to highlight that we have updated our investor presentation and is available on our website, www.GLGPartners.com and has also been furnished today with the SEC in our Form 8-K.

[Noam Gottesman:]

Thanks Jeff. I’d like to share some comments regarding a variety of matters, both in the market and the alternative asset management industry as well as GLG specifically. The comments will be broad and should address many of the questions that I believe shareholders have. I want to comment on each of the following; our investment performance, the transition of the emerging markets business, the new prime brokerage landscape, Lehman’s bankruptcy in GLG, the redemptions outlook, our debt covenants, our strategic efforts and the future of the business. Though this may appear to be a long list of issues and developments to cover, I want to underscore that despite the challenges of recent months we see significant opportunity and believe that the overall optionality for the firm has never been greater. First on performance, as you are aware the high level of economic uncertainty has fostered an extraordinary period in the capital markets globally. We have seen widespread failures of financial institutions and massive government intervention in the financial system, everything from broadening guarantees on deposits and short selling bans to full blown nationalizations. We have also seen substantial de-leveraging of market participants broadly, a dramatic increase in correlations across asset classes and record levels of volatility. Given the cross currents of rapidly decelerating economies, great headlines on financials and significant fiscal and monetary stimulus, many of the major market indices fell hard in the first ten months of 2008. With the MSCI World Index down 37%, the Merrill Lynch Global Convertible Index down 31%, MSCI Europe down 39% and the S&P 500 down 34%, against this inauspicious backdrop we have significantly reduced our risk profile and our leverage across the GLG funds. While this was a painful exercise and we’re very disappointed with our absolute performance, we are pleased that many of our funds now have relatively liquid portfolios with significant buying capacity. In fact, we believe that the investment opportunities that are being created in today’s markets will likely prove to be compelling. Along these lines, we recently established a Senior Management Advisory Group at GLG to better insure that we fully capture the insights of our deep bench of leading managers as we consider the range of investment and related strategic opportunities. However, we do believe we are in the midst of a massive shake up in the alternative asset management sector and only those firms that survive this period will be afforded the opportunity to capitalize on these prospects. We have been and are positioning GLG to both weather the storm and profit from the opportunity. In terms of our hedge funds, our dollar weighted performance was down 16.5% for the first nine months of 2008 and down 12.8% for the third quarter of 2008. If we exclude the main emerging market fund as we did for illustrative purposes in our last two earnings calls, on the dollar weighted basis our funds were down 12.1% for the first nine months of 2008 and down 11.1% in the third quarter 2008. Though our absolute returns were negative given the performance of the relevant market indices in the first nine months our relative returns held up okay. That said, October proved to be a difficult month with our preliminary estimates indicating a dollar weighted decline of approximately 6% for our hedge funds. Clearly this has been a challenging period for us, not only because of the showing in the emerging market fund but also because of the severe [dislocations] in the credit and convertible bond markets. Finally, many of our funds have residual exposure to Lehman Brothers International Europe which we’ve estimated at $95 million. This exposure was written down to $0.00 at September 30 and was reflected in our performance numbers. It is hard to quantify the full impact of Lehman’s bankruptcy. Obviously the disruption to information, failed buy ins, loss of hedges and manager’s time spent on trying to ascertain and reconcile our positions has been a large cost to our funds. Next, the transition to the emerging markets business. The transition of leadership in GLG’s emerging markets business has been a top priority for us given Greg Coffey and his team’s previously announced scheduled departure at the end of October. We’re very excited about the senior investment professionals’ team whom we have hired to manage our emerging markets business and build out our macro as well as special situations platform. The management transition in our emerging markets funds occurred at the end of October. Driss Ben-Brahim of former Golden Sachs Partners is responsible for developing a macro platform as well as a special situations platform. Karim Abdel-Motaal and Bart Turtelboom have joined the firm as co-heads of GLG’s Emerging Markets Funds, Emerging Currency and Fixed Income Funds and Emerging Equity Funds. They come from Morgan Stanley where they co-ran the Emerging Markets Business. And most recently Jamil Baz joined the firm from PIMCO as GLG’s Chief Investment Strategist. Our emerging markets platform had roughly $2 billion in assets under management post November 3 dealing day, reflecting the $4 billion in out flows we had anticipated as well as disappointing investment performance. Now that the new teams are staffed, we will embark on a series of road shows aimed at raising capital. Next, the new prime broker landscape. The prime broker landscape has changed materially in recent months. Basically, there are fewer players and the cost of capital has gone up, very materially for certain strategies. We have been proactive and dynamic in our approach to the changing landscape and though we did suffer losses with the Lehman failure, we had been aggressively moving business away from them in the months leading up to the bankruptcy and established a series of bespoke arrangements with them to protect our interests. The fact is, all our funds now have at least one prime broker that is a commercial banker and all hedge funds have at least two prime brokers. In terms of the higher costs of capital this has manifested itself in both lower advance rates and higher funding costs and we are adjusting our strategies accordingly. This transition has proven the most challenging for our more leveraged dependent strategies says our market neutral convertible and credit funds. That said, we remain committed to our franchising converts and expect to be able to ultimately capitalize on the substantial dislocation in the marketplace. Next I’d like to address Lehman’s bankruptcy in GLG. Lehman Entities hold $76 million in GLG debt and 33.8 million common shares of GLG. The common shares are subject to transfer restrictions which allow for up to 8.4 million shares to be sold in the next 12 months. We have had discussions with Lehman and do not believe that the common shares will come to the marketplace in the near term. Next the redemptions outlook. Hedge funds across the industry have seen and will likely continue to see net out flows given the recent negative investment performance recorded at most funds. This has prompted a bit of a vicious circle as the anticipation of redemptions is contributing to the de-leveraging across asset classes which is further pressurizing valuations and performance. In our case we had seen positive net flows for the first six months of 2008 but saw the tide turn to out flows in the third quarter as the expected redemptions in our emerging markets platform began to materialize, and our performance more broadly began to wane. Unsurprisingly, given the markets, redemption requests picked up and in flows slowed as we moved through September and into the fourth quarter. These trends are likely being amplified somewhat by institutions taking advantage of the relatively short notice periods, generally monthly liquidity with 30 to 60 days notice that we have and have always had to accommodate the discretionary high net worth month we manage. Even so, we believe many of the industry wide pressures will be somewhat litigated by our low concentration of funds to fund money and the longstanding base of high net worth clients. It is also worth noting that redemption requests are not ironclad and we have seen clients enter requests to preserve flexibility and subsequently withdraw them before the dealing day. That being said, given current market conditions and the heightened level of redemption requests, the board of several GLG funds have imposed gates and set up side pockets so as to treat all investors equally. Finally, while still on the topic of redemptions and flows I think it is equally important to emphasize that mandates are still funding and being won. Our marketing teams remain fully engaged. For instance, we were pleased to launch the 130/30 program at Banca Fideuram. While the initial Fideuram funding of approximately $1.6 billion was below the $3 billion we had originally announced in May, the difference is entirely attributable to the effect of market depreciation and the strengthening of the dollar on the predecessor portfolio. In the time period, the euro fell approximately 13% versus the dollar and the MSCI World Index declined by 39%. The funds were previously in loan only strategies that had suffered with the equity markets. Furthermore, we’re still making headway in the U.S. and in fact we just won our second U.S. state pension fund mandate. It is for $150 million and we expect the initial funding next month. Next I’d like to address our debt covenants. As of September 30, 2008 we had $570 million in funded debt latent to the reverse acquisition transaction with Freedom. There are two key financial covenants when it comes to our credit agreement. One is an AUM covenant which is tested annually at year end and two is the leverage test conducted quarterly, based on funded debt and trailing four quarter adjusted EBITDA where the ratio must be below 4.5 times to 1. The AUM covenant essentially keys off our pre-paying AUM which is essentially our gross assets under management. Our gross AUM was $21.2 billion at the end of the third quarter. The threshold for the year end 2008 AUM is $15 billion and we feel confident that this will not be an issue for us. The leverage ratio was not an issue at the end of the third quarter and will not be an issue at year end either. Next I’d like to address our strategic efforts. We believe the alternative asset management business is at a crossroads. The key issue is how the industry will evolve over the next 12 months and beyond with the leverage that emanated largely from the balance sheets of investment banks now substantially reduced. We are mindful of the shifting landscape and are evaluating the best routes forward in this transitional period. We do not believe that relying on investment bank provided leverage to come back for various investment strategies is prudent. And fortunately we have an experienced management team and have evolved into a firm with DNA that can adapt to new circumstances. Since our inception 13 years ago we’ve been at the forefront of change in the industry, weaving a high net worth franchise into a multi-strategy institutional friendly platform. Our long only and 130/30 offerings are products we had gone into as we did in the emerging market space before it became fashionable for alternative managers to do so. We are pursuing a number of opportunities to improve our overall positioning in the current environment. First we have taken steps to adjust to a lower revenue environment as many of our funds are currently below the high water mark and the AUM levels are down. We are currently in the advanced stages of reviewing our expense structure. We will be reducing headcount though we will continue to selectively and opportunistically hire. We have also begun to significantly reengineer our G&A cost base. Obviously we’re moving our compensation levels down relative to revenues. The physics are pretty straightforward. The vast majority of compensation at GLG is linked to our investment professionals and their contribution to the performance of GLG funds. With many funds showing negative absolute performance, discretionary compensation would be down materially even though we will continue to reward our strongest contributors. On the positive side, today we have approximately $5.1 billion of assets under management in a position to earn performancies. In the GLG model as you know our funds are not linked to each other and in flows come without high water marks. And we’re earning management fees on our full [math] AUM. Beyond taking a close look at our costs, we continue to explore strategic options. We believe the asset management space is ripe with opportunities in the current environment, everything from lift outs to teams to acquisitions of asset managers. We went public in part to give us the option to become a consolidate when the opportunities presented themselves. And while it is very frustrating to not be operating from a full position of strength during this opportunity rich period, we will nonetheless press forward. We have been approached by a number of parties, sovereigns, institutions as well as family groups who have expressed interest in partnering or investing in GLG. We are evaluating a variety of these opportunities and could see something consummated by year end. In spite of the challenges of recent months, we believe our optionality has never been greater. Finally to sum up, though the environment remains challenging we remain cautiously optimistic about our prospects and about our business model. We’re focused on meeting the needs of our investment clients and insuring that we continue to create value for our shareholders. Operator, let’s open up the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from Craig Siegenthaler – Credit Suisse.

[Craig Siegenthaler:]

My first question really deals with the high profile talent you hired this summer. You went through it briefly but in terms of timing, when can we think about them really generating business and have they been actually meeting with some of your institutional and private wealth clients?

[Noam Gottesman:]

They’re already in charge of the portfolios. They’ve taken over so they’re now on day-to-day management. They’re preparing presentations and road show schedules on the new products that we’re launching and to meet with the existing clients of those funds plus new prospective ones. And so I would expect to see activity from the first quarter of next year in terms of in flows. Between now and then we’re focusing more in insuring that the portfolios that remain are in the best possible shape and are managed appropriately in this environment. And then we will begin the marketing period. There has been a significant interest in meeting with them.

[Craig Siegenthaler:]

And how many – when we think about strategies because there was the individual from Goldman, the two from Morgan Stanley, PIMCO and then two individuals from Merrill, how many different strategies does that really break out into?

[Noam Gottesman:]

Well we had four strategies originally. We will add a macro strategy to that and we’ve been approached on a couple of bespoke managed accounts for various strategies. But I would expect to see one if not two additional ones relatively soon.

[Craig Siegenthaler:]

My second question really is on distribution right now because if you break it up really into three buckets being institutional, high net worth and then really fund to fund, which channel have you been seeing the most pressure on as of the last – let’s say the last three or four months? And going forward do you expect that to change?

[Noam Gottesman:]

In terms of, I mean, we track this pretty closely and we’ve seen really an almost an extraordinary stickiness among our private clients where the change on the year in terms of redemptions is only 2%. Conversely, the insurance sector which invested in fund to funds, banks which invested in fund to funds and the fund to fund period group itself, we’ve seen more material decreases with insurance roughly 6.5% reductions, fund to funds and bank around 18.3%. The private individual base continues to be extremely sticky and it’s more an out flow of fund to funds which I think as you know was more heavily concentrated in our emerging markets business generally.

[Craig Siegenthaler:]

When you think about opportunities in TARP is there any opportunities for a large hedge fund to win mandates through that business? Because I don’t believe any asset managers have really been announced by winning any mandates from that fund yet.

[Noam Gottesman:]

I’m sure there will be opportunities and I’m hopeful that some hedge funds will benefit from it. From what we’ve seen at the moment, I don’t expect us to be a participant in that.

[Operator:]

Your next question comes from Prashant Bhatia – Citigroup.

[Prashant Bhatia:]

The $3 billion mandate it looks like it was lowered to $1.6. Is there any portion that will be funded going forward? Or is it going to be $1.6?

[Noam Gottesman:]

Well I think as I explained the $3 billion was an existing $3 billion portfolio when it was awarded. It was a euro based portfolio and during the time – from the time it was awarded until the time it funded, the dollar appreciated by roughly 13% versus the euro and the Morgan Stanley World Index declined by 39% during that period, which is why the $3 billion became $1.6. What I would like to stress is as we’d explained initially, this is an initial portfolio. The teams at Banca Fideuram are working hard with us on presenting the managers and the portfolios throughout the distribution network. And our expectation is that we will start to see in flows from investors now that the portfolios are alive. The initial funding came from the banks previous portfolio as opposed to going out and distributing it through their client base we would now expect to see.

[Prashant Bhatia:]

Is there a way you could put some kind of estimate on what you’d expect to see in terms of redemptions over the next three or four months? Do you have requests in the pipeline right now? Is there some way to throw out an estimate on that?

[Noam Gottesman:]

It’s not really been our practice to give guidance or [fork] estimate flows and redemption levels are clearly elevated industry wide and we’re not immune. We have, however, experienced somewhat of an independent phenomena with our emerging markets platform given the leadership transition. We’re seeing the $4 billion in out flows that we’d anticipated last April. And I think our trends are probably being amplified somewhat by institutions taking advantage of our relatively short notice periods that we’ve always had in order to accommodate the high net worth money. Even so in the most recent period net out flows outside of AUM were only $0.9 billion and we believe that our low concentration of the funds money and the longstanding base of high net worth clients is going to serve us well.

[Prashant Bhatia:]

And maybe another way, could you quantify the pool of assets that are in the insurance banks and fund to funds, the areas that you’re seeing some large redemptions from?

[Noam Gottesman:]

I think that the insurance banks and fund to funds as of the 30th of September were roughly 34% - 32, 34% of our business. But I think that would be somewhat misleading in that probably 8% of that or 9% of that is private clients investing through banks. So I would say it’s around the low 20s percentage would be insurance banks and fund to funds.

[Prashant Bhatia:]

And then on the AUM covenant that you have, is there any impact once you’re past the year end measurement date? Or does that just get re-measured next year?

[Noam Gottesman:]

It’s a 31st of December measurement so it’ll then move on to the 31st of December of 2009.

[Prashant Bhatia:]

And in terms of – you talk about de-leveraging in the release. Can you give a feel for what you were leveraged at and what you’re going to be leveraged at in aggregate or maybe in the few funds that are heavy users of leverage?

[Noam Gottesman:]

We don’t have it in aggregate and I’m not so sure it would be wise to share it. But just to give you some illustrative examples I think most of the long short funds are between – would not have more than say 120 to 130% gross with the vast majority of them being below 100 currently. Our convertible [odd] funds which historically would have been between 3 to 5 possibly higher leverage are below 3 and moving lower. And internal we’ve taken a pretty conservative stance. Now it’s not necessarily because we believe that the opportunities aren’t right. But there’s been a very substantial change among the prime brokerage world. If you take a convertible bond that would have had a 10 to 12% margin rate associated with it three, four, five months ago in some cases we’ve seen those rates edge up in the last couple of months to 15, 20, 25, 30 and looking like moving closer to 40% margin rates which just isn’t – necessitates a reduction in leverage. We’ve also reduced leverage because of the increased volatility we’ve had, just sort of one of the craziest 30 day periods that anybody has ever seen. And so the leverage is lower really across the board and in some, as I said I’d define it in some cases it’s because the prime brokerage landscape has changed and in some cases it’s because we’d like to have more cash and be in the position to be more opportunistic.

[Prashant Bhatia:]

And then just on balancing the retention of employees with some of the high water marks in place here, how do you balance that with the compensation? Is there going to be some sort of special incentive put in? Or how are you going to balance retaining people?

[Noam Gottesman:]

You know, this is a business where people get paid for performance and reduction. And if you look at performance fees and revenues earned by the company, then the case could be made for even larger reduction in comp expenses. But we haven’t done that because we’re trying to strike a balance. As we stand now, we’re not the only financial services company experiencing a difficult performance [patch] and we’re cognizant that we need to keep our best people and to keep certain economics for our shareholders so we’re trying to strike the right balance.

[Prashant Bhatia:]

You talked about potentially getting a partner, maybe even by year end. Could you talk about what your priorities are for that partner? Is it to bring capital into the firm or is it AUM or distribution or something else?

[Noam Gottesman:]

I think we’re evaluating. We’ve been approached by a relatively good number of people and we’re evaluating a variety of different opportunities and as soon as we can say more about it we will.

[Prashant Bhatia:]

But could you maybe talk about what you’re looking for in general out of a partner?

[Noam Gottesman:]

Not really at the moment.

[Operator:]

Your next question comes from Roger Freeman – Barclays Capital.

[Roger Freeman:]

I guess just to come back to a couple of Prashant’s questions, in terms of comp you point out that you’re obviously not the only firm in your peer group that’s suffering losses. But if you look at performances let’s say down more than average so on the one hand comp comes down because performance is down but how do you think about it from a competitive standpoint? Does that lead to higher comp? You mentioned the comp ratio could go up. Are we thinking about this for the fourth Q or for next year?

[Noam Gottesman:]

I don’t think I mentioned that the comp rate could go up at all. On the contrary, but I think just a couple of things, first of all the absolute only way to performance is relatively weak. I’m not sure I would categorize it as worth [inaudible] and certainly if one takes into account the impact of the large wind down in our emerging markets business, I don’t think it’s – it compares unfavorably. Nonetheless, you know you’re right to ask. We have substantial accruals for bonuses. It’s too early to tell how the fourth quarter will do but I think we definitely have scope based on the market to reduce bonus accruals. I think we are – we have historically been very fair and correct with the people at GLG and we will continue to do so. And the reality is that as opposed to us having an issue in retaining people, we’re having a massive surge of people trying to come to GLG. And the pain within the industry is such that I think individuals and firms within the industry are looking at a company that has a very strong multi-strategy platform and framework where they could perhaps achieve more and do better in the current environment. So we’re looking – we’re very much looking with an eye towards trying to add good people who will increase by diversification of our product, our funds are not linked economically one to the other so if we have funds that are doing better than others, the average isn’t going to harm them. And I think that’s a major competitive advantage that we have certainly relative to our other public comparables where really there’s a netting off within the fund which we don’t have.

[Roger Freeman:]

And I guess actually on the point of bringing in some new talent, maybe capitalize on talent that is available in the market, should we expect to see some meaningful hires here during the fourth quarter? And secondly when you think about the incentive to bring them on board, how does equity factor into day versus maybe year ago given the performance in the stock price, i.e., do you need more cash to do that?

[Noam Gottesman:]

I definitely expect to see something within the next quarter or two that’s – there are really great opportunities not only on the individual but also on the firm level. In terms of equity it’s at a low price and for us to part with equity it would have to be because we really felt there was unbelievably accretive at these prices for us to do that.

[Roger Freeman:]

And then I had a question I guess on the convert strategy. You talked about the leverage coming down and we know that during the month of October it was probably asset class hit hardest in terms of higher collateralization rates. So can you tell us what the performance of converts was in October? And secondly how do you think about that strategy going over it? Because you mentioned that it’s something to you need to rethink given lower leverage that you’re likely to get going forward?

[Noam Gottesman:]

We’ve probably had more investor interest and reverse inquiry from investors on putting money into long only converts than any other product over the last month, because people recognize that there is an historically cheap valuations and countered with this forced de-leveraging. In effect what’s happened is that, you know, hedge funds by extension have been an extension of investment bank balance sheets and nowhere more so than in the convertible market. And as investment banks have had to reduce their balance sheets exposure, this has naturally led to upward pressure on margin rates and higher costs. And as I mentioned, the more leverage dependent strategies of which convertible [arbor] charges one, have been hit. That associated with short selling bans which have made it harder for them to maneuver within the sector has led to distress. So we had a – it’s been a poor period for all convertibles and there’s really nowhere to hide. If you were in the sector you got hurt last month. But we do find just enormous opportunity and interestingly enough, as I said, by a very large factor the reverse inquiries we’re getting from clients wanting us to prepare portfolios to come up with propositions and proposals for them is in the convertible space.

[Roger Freeman:]

Can you just help us think about the gates so I guess on credit and what was the other one that hit in this quarter? I think it was market neutral, yes, were those already in effect? Or were those put into effect this quarter? And how much of your total AUM is subject to gates at this point?

[Noam Gottesman:]

First of all the gates were effective November 3 so they weren’t impactful last quarter. And you know the whole process of it was really to try and given the height and level of redemptions in the industry generally was to create an environment where we could treat all investors fairly. And specifically the fund directors decided to impose the gate on the market neutral fund and on our credit fund. And additionally in something at the European long short fund with contributing the LEF liquid, so generally the last mile private equity positions into a separate vehicle so that the bulk of the liquid investments have been – will get spun off and it won’t create a need to impair ongoing investors or to create forced liquidations. As I think I mentioned that we have approximately $5.1 billion of AUM today that are in the position to earn performance fees. If you deduct it from the assets that we had that we ended the quarter with, it’ll give you your answer.

[Operator:]

Since there are no more questions in the queue, I will now turn the call back over to Noam for closing remarks.

[Noam Gottesman:]

This concludes our third quarter earnings conference call today. On behalf of all of us at GLG thank you very much for participating.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.