The Undaunted

More important, if gross assets — a measure that includes funds that invest in other GLG funds — which were $21.2 billion at the end of the third quarter, dropped below $15 billion at year-end, GLG Partners would violate a covenant on a $570 million loan from Citigroup that the two men had used to take the company public in an unusual reverse merger in 2007. Gottesman and Roman knew they had to do something — and do it fast — to stave off a possible default.

Fortunately for the duo, Paris-based Société Générale Asset Management was having its own problems. A subsidiary of Société Générale, the big French bank that lost $7.2 billion at the hands of a rogue trader in January 2008, SGAM was trying to unload its British asset management unit, a noncore business with a modest $8.2 billion in traditional long-only assets. Jean-Pierre Mustier, chairman and CEO of SGAM, contacted Roman, whom he has known since 1989, when they teamed up to issue the first warrant on France’s CAC 40 index, to see if GLG might be interested.

It certainly was. In late December, Gottesman, who is also chairman, and Roman agreed to buy SGAM UK, gaining its much-needed assets as well as approximately 130 investment professionals and staffers. In one fell swoop, GLG — which reportedly is paying less than $10 million in cash for SGAM UK — removed the biggest near-term risk to its business.

Gottesman, 47, and Roman, 45, play down the significance of the covenant, as well as the SGAM deal’s significance in staving off default, stressing that GLG had a number of options to avoid default or renegotiate the loan with its bankers. However, knowledgeable observers say that at the very least, the deal provided the company with breathing room, especially given that the performance of some of its funds worsened in the final quarter amid an already bad year for most of its funds and the rest of the hedge fund industry.

“This was a nice deal,” says Roger Freeman, an analyst who follows GLG and other asset managers for Barclays Capital in New York, and who estimates year-end gross assets were about $16 billion (net assets were an estimated $13 billion). The deal is expected to close in the first quarter, although GLG will act as subadviser to SGAM UK’s funds in the interim.

The acquisition is part of a flurry of activity that demonstrates GLG’s undaunted ambitions. At a time when most hedge funds and traditional asset managers are retrenching, Gottesman, Roman and GLG co-founder Pierre Lagrange, 47, talk audaciously about growing the business. They intend to expand GLG’s current menu of 40 hedge funds and long-only products by purchasing small money managers and hedge funds outright or hiring away entire teams from other firms. Since last summer GLG has added ten new senior professionals, including chief investment strategist Jamil Baz, who was a portfolio manager at Pacific Investment Management Co., and former Goldman Sachs International partner Driss Ben-Brahim, who is developing a new special-situations platform at GLG (see related story, Ten Reasons GLG Thinks It Will Triumph). The firm employs about 300 people, including 125 investment professionals, and has offices in London, New York and the Cayman Islands.

GLG is pushing aggressively into new markets. One of the reasons Gottesman, Lagrange and Roman wanted to take the firm public was to raise its visibility — and assets — in the U.S. by listing shares on the New York Stock Exchange. GLG is also increasing its presence in Europe, Asia and the Middle East, thanks in part to the $1.6 billion it received last fall from the asset management division of Italy’s Banca Fideuram to manage several 130/30 long-short products and long-only funds for the bank’s clients. In addition, GLG hopes to benefit from relationships with Istithmar World, a Dubai-owned private equity and alternative-investment firm, and German private bank Sal. Oppenheim, which each bought 3 percent of GLG in August 2007 (2 percent after the merger).

Gottesman, in particular, is not short on ambition. He talks about GLG becoming one of the world’s five biggest alternative-asset management firms, which he believes will each manage about $50 billion, offering both long-only and hedge fund products.

Fulfilling such grand visions won’t be easy. Gottesman, Lagrange, Roman and their GLG colleagues face obstacles that will challenge their ability to grow and thrive in what may be the most difficult investment environment since the 1930s. First, they must shut the spigot on the outflow from their own funds, which amounted to $3.5 billion in its Emerging Markets Fund alone after GLG announced in April that star emerging-markets manager Greg Coffey would be leaving at the end of October. Through October, GLG’s hedge funds fell 22 percent — 17.7 percent excluding the Emerging Markets Fund, which was heavily leveraged and fully invested at the time Coffey announced his departure. GLG’s long-only funds were off 39.2 percent, on average, during the same period.

Coffey’s exit unnervingly evoked memories of an earlier star manager, Philippe Jabre, who left the firm in 2006 after he and GLG were accused by regulators in several countries of engaging in illegal stock trading (they both subsequently settled). Although Coffey was not involved in any wrongdoing, it was a stark reminder to GLG investors of the risk of depending on a hot manager. Meanwhile, GLG must convince investors to ignore the firm’s other brushes with regulators; in 2007 it settled charges of illegal short-selling brought by the Securities and Exchange Commission, paying about $3.2 million in fines without admitting to or denying the SEC’s findings.

More recently, GLG has created ill will with investors who are unhappy that the firm restricted redemptions from one of its largest hedge funds last fall and placed illiquid assets of other funds into side pockets.

“I would not invest with them,” says Bradley Balter, founder of Boston-based Balter Capital Management, which advises individuals and institutions on investing in hedge funds. “If you put up gates, it is like putting a bullet in your head.”

And with most of GLG’s hedge funds down in 2008 — in a few cases more than 30 percent — the firm will need to find creative ways to motivate its professionals, who face the possibility of earning no bonuses for at least two years, or until their funds meet their high-water marks.

GLG also must figure out how to revive its withering stock price. In late 2007 it became one of the only hedge fund firms to go public, in a reverse merger with publicly traded Freedom Acquisition Holdings, promising to use its shares as currency to buy other managers. But GLG’s stock price was just $2.47 a share in mid-January, rebounding from its December 2008 low of $1.86 but well off its all-time high of $14.44, which it hit three days after the merger was completed. The firm’s recent market capitalization: a measly $600 million.

So far all the public offering has done is enrich senior management, especially co-founders Gottesman and Lagrange, who each reaped a package of stock and cash valued at nearly $1 billion at the time of the deal. Indeed, the potential strain on GLG’s current cash position was underscored when the firm announced on December 30 that it was suspending its quarterly dividend, citing a desire to retain capital. GLG’s net revenue and other income for the first nine months of 2008 decreased by 28.9 percent, year-over-year, to $422.3 million, largely on lower levels of performance fees, as the company reported a net loss of $487 million for the same period.

Gottesman and Roman are aware that jittery investors, especially the wealthy Europeans who propelled GLG’s 36 percent compounded annual growth from 2001 to 2007 but fled its funds during the recent turmoil, will remain on the sidelines until markets stabilize. They also know that many potential investors are wary of hedge funds in general, given the scores of funds that racked up huge losses in 2008. But they are undeterred. Says Roman: “Unless we are going to a 1929 situation, the world is a very exciting place to invest. It has a lot of value.”

Noam Gottesman and Pierre Lagrange have been friends since they were young brokers in the late 1980s in the private client group at Goldman Sachs International in London. Initially, they worked together as a team: The Belgian-born Lagrange specialized in European equities; Gottesman, a dual American and Israeli citizen, focused on U.S. stocks. They worked alongside broker Jonathan Green, who had trained at U.K. brokerage firm James Capel & Co. and had his own team.

By 1995, Gottesman, Lagrange and Green were advising superwealthy clients on a combined $1 billion–plus in assets. In September of that year, they left Goldman to start GLG (the name comes from the first initials of their surnames) as a division within investment bank Lehman Brothers. In 2000 they spun off GLG from Lehman, which bought a 20 percent stake in the firm. (Today that stake, now 10.5 percent, is tied up in bankruptcy court, following Lehman’s Chapter 11 filing last September.)

Jabre joined GLG from BAII Asset Management, a London-based subsidiary of France’s Banque Nationale de Paris, as a partner in 1997. The then 37-year-old Lebanese-born Frenchman already had a reputation as one of the pioneers of convertible arbitrage in Europe — buying convertible bonds while simultaneously shorting the shares of the company issuing the debt. The strategy was at the core of his success managing the GLG Market Neutral Fund, which was up, after fees, an average of 20.9 percent a year from 1998 through 2005.

Unlike other firms that were centered around just one or two funds, such as London rivals Brevan Howard Asset Management and Lansdowne Partners, GLG’s founders believed that a multistrategy roster of funds, including long-only portfolios, made the most sense for their largely European high-net-worth clientele — and acted as a hedge in what they perceived to be a cyclical business. So, after launching its first vehicle, GLG Performance Fund, in 1997, GLG quickly followed with ten more funds during the next few years, including both hedge funds and long-only products.

After the spin-off from Lehman in 2000, GLG went on an expansion tear, capitalizing on the rapidly growing demand for hedge funds among investors who had suffered large losses during the global equity bear market at the start of this decade. From 2002 through 2007, GLG’s assets swelled from $3.9 billion to $24.6 billion (including about $4 billion in long-only strategies), as the firm averaged five product launches a year.

No one deserves more credit for that growth than the camera-shy Gottesman, who has a BA in history from Columbia University and managed U.S. equities at GLG until the firm went public in 2007. “Noam can sell ice to Eskimos,” says a former employee. “He had the skill to hire great people and get the most out of them.”

At the beginning of the decade, GLG’s roster of clients expanded from wealthy Europeans to include more institutions, funds of hedge funds and private banks, which, says Gottesman, wanted more specialty funds. In addition to funds emphasizing equities, convertible bonds and market-neutral strategies, GLG launched niche vehicles focusing on individual sectors like technology and financials, as well as on Japanese securities and credit.

GLG’s growth plans, however, were nearly derailed when the U.K.’s Financial Services Authority began investigating in 2004 whether Jabre had improperly used nonpublic information about a 2003 convertible bond sale by Sumitomo Mitsui Financial Group to short the Japanese bank’s shares in advance of the debt offering. In August 2006 the FSA fined the firm and Jabre £750,000 ($1.42 million) each. Jabre had left GLG in February 2006 and now runs his own Geneva-based firm, Jabre Capital. In December 2006, in a separate investigation, French regulators fined GLG €1.5 million ($2 million) for alleged trading abuses related to a 2002 convertible bond sale by telecommunications equipment maker Alcatel. In both cases, GLG paid the fines, neither admitting nor denying guilt.

Roman joined GLG in September 2005. An 18-year veteran of Goldman Sachs, Roman had spent the previous five years at the investment bank as global co-head of equities and prime brokerage. His hiring was considered a coup and helped boost GLG’s then-sagging credibility. Roman is credited with tightening management, oversight and compliance and with building the firm’s infrastructure.

“The regulatory issues were not the sole or motivating reason for hiring Manny, but were one of the additional benefits,” says Lagrange, who recalls phoning Gottesman one night and saying they should hire Roman, whom they had known for nearly two decades. “After Jabre left, Noam and I felt the firm needed to be seriously managed by someone in addition to us, and someone who had done it before.”

Roman, who has a BA in applied mathematics from the University of Paris and an MBA in finance from the University of Chicago, co-manages GLG’s day-to-day operations. Lagrange, who has degrees in engineering and business from Belgium’s Solvay Business School, compares Roman’s role to having a McKinsey & Co. consultant in-house, someone who doesn’t manage money and isn’t part of the firm’s legacy.

Antonio Borges, chairman of the U.K. Hedge Fund Standards Board, who was vice chairman of Goldman Sachs International from 2000 to 2008, says Roman is especially well respected in the City: “Everyone in London listens when he speaks.”

Despite the rapid growth in the number of funds at GLG, the firm’s overall performance always seemed to rely heavily on the hot hand of one manager. From 1997 to 2005 it was Jabre, who once managed about 30 percent of the assets at GLG and accounted for 40 percent of its profits. Then there was Coffey, whose GLG Emerging Markets Fund racked up 60 percent and 50 percent returns in 2006 and 2007, respectively. In 2007, Coffey earned $300 million and, including stock, received a total compensation package worth nearly $600 million.

Last spring the Australian native stunned GLG and its clients when he announced he was leaving in the fall in hopes of starting his own firm. At the time, Coffey was overseeing $7 billion of GLG’s nearly $24 billion in assets. When he left on October 31, forfeiting some $250 million in deferred compensation, the four funds he was managing were deeply in the red, including the once–$4.6 billion GLG Emerging Markets Fund, which was down a stunning 40 percent.

Some critics suggest that Coffey’s success at GLG could have come in part from riding the hot emerging-markets wave and that one reason for his recent troubles was that the firm had given him too much money to manage. “He lost his shirt in equities,” notes a former GLG employee, who describes Coffey as an excellent macro trader, especially when it comes to bonds and currencies, and says he should succeed in his new job as co-CIO for Europe at Louis Bacon’s Moore Capital Management, whose London offices are in the same posh Mayfair building as GLG’s.

Gottesman disputes the notion that GLG went through a series of hot hands that ultimately flamed out. He also insists there is little risk of another Coffey-type event, calling it a unique situation.

“He was the sole portfolio manager on his funds,” Gottesman says. “He had a team beneath him, but he was really the only trigger-puller within his group.” With its recent hires, GLG is moving away from that approach, using multiple portfolio managers on funds and trying to encourage teamwork.

“By joining at a reasonably senior level, I thought I could have an impact and help transform the company,” says Ben-Brahim, who ran the proprietary trading desk at Goldman in London before joining GLG last summer.

Meanwhile, like many other hedge fund firms, GLG last year temporarily restricted redemptions on some of its funds. The firm suspended redemptions on the Market Neutral Fund and set up side pockets in which to place illiquid securities from its European Long-Short Fund and Emerging Markets Fund so it would not have to unload them at very low prices.

Roman says GLG will allow investors to fully redeem their holdings once liquidity returns to the markets. Until then the firm has cut its management fee from 2 percent to 0.5 percent on the funds that have gates. “Our financial penalty is quite hefty,” he notes.

Going public had long held appeal for the partners at GLG. They initially considered the idea in 2003, after minority shareholder Lehman Brothers offered to buy the 80 percent of the firm it didn’t already own. Gottesman and Lagrange didn’t want to be part of a large investment bank again and instead mulled doing an IPO, rare among hedge funds firms but not among asset managers. But the discussions never became serious.

That changed around the beginning of 2007, when GLG was approached by several companies that wanted to acquire all or part of the firm. But GLG again passed on the offers because it wanted to control its own destiny.

Meanwhile, Nicolas Berggruen and Martin Franklin had formed Freedom Acquisition, a special-purpose acquisition company that raised $528 million in a December 2006 public offering to purchase operating businesses. Berggruen had been a GLG investor. After looking at a few potential targets, he and Franklin called GLG. “Nicolas knew we wanted to change our capital structure,” Gottesman says.

The plan, announced in June 2007, called for Freedom to acquire GLG, which in turn would control the company, providing Gottesman and Lagrange with a fast track to an IPO. Initially, however, they were leery of the SPAC structure.

“Was it a real thing?” Lagrange recalls wondering. “Did it have the same cachet?”

Lagrange and Gottesman came around fairly quickly after realizing that going public through a reverse merger was no different in terms of the end result and could be done more cheaply and quickly than an IPO. “We were able to become public without the long, involved road shows,” says Gottesman.

In November 2007, Freedom completed the acquisition and GLG Partners joined Fortress Investment Group, Och-Ziff Capital Management Group and London-based RAB Capital as publicly traded hedge fund firms. Gottesman says the main motivation for going public was to be able to use GLG’s shares to acquire other money managers. The transaction, though, also made the already wealthy founders much richer. Gottesman and Lagrange each collected nearly $1 billion in cash and stock from the deal; Roman received about $380 million. In each case a little more than half of the money was in shares, which have subsequently plummeted in value by more than 80 percent.

Freedom’s shareholders own roughly 32 percent of GLG Partners’ NYSE–listed shares; GLG’s previous equity holders have the remaining 68 percent (Gottesman and Lagrange own almost 20 percent apiece). Before the transaction, which was financed by the $570 million credit facility from Citigroup, GLG had attracted two significant investors — Istithmar and Sal. Oppenheim — which each bought their stakes from co-founder Green, who retired in 2003 and owns 1.2 percent of the firm.

Gottesman, Lagrange and Roman expect the hedge fund industry to undergo a major shake-out following the devastation of 2008. They believe that GLG, with its broadly diversified platform, is well positioned to be a dominant player as the industry restructures.

“We don’t view ourselves as a hedge fund but as an asset manager,” says Gottesman. “The asset management business is rife with opportunity.”

The expansion has started. Last year, GLG added about 20 investment professionals, Gottesman says, using some of the $250 million or so in cash and stock that Coffey left on the table when he bolted. Gottesman points out that the firm can offer bonuses based on the performance of new funds, which aren’t affected by high-water marks, as well as GLG’s very low stock price.

As it looks to build out, GLG is mindful that in an environment where there is less credit available from investment banks, strategies employing less borrowing — such as long-short, macro and commodities trading — will be more successful. GLG is mostly eyeing small hedge fund firms with a couple of key people and perhaps eight or ten employees, operations that can’t afford the kind of compliance and other infrastructure that investors will no doubt demand in the future, especially in the post–Bernard Madoff era. GLG is also seeking to expand its offerings of managed accounts, which lessen some of the risk.

“Investors with managed accounts are not at the mercy of other investors,” notes Steven Roth, who joined GLG from Deutsche Bank in November 2005 to co-manage the GLG Market Neutral and GLG Global Convertible funds.

“We will see a flood of businesses to buy,” says Roman. “Our job is to avoid making bad acquisitions.”

Several of GLG’s recent hires — including Ben-Brahim, Karim Abdel-Motaal and Bart Turtelboom — concede that they had considered starting their own funds before joining GLG but felt the current environment was not favorable. “Bart and I were seriously thinking of doing it ourselves,” says Abdel-Motaal, who with Turtelboom was hired from Morgan Stanley to replace Coffey. “It was an easy decision to come here. It was beyond obvious that this was the biggest emerging-markets seat on the planet.”

Gottesman and Roman also expect to grow their menu of long-only products, especially funds marketed to non-U.S. institutional and high-net-worth investors. At the end of 2008, GLG had about $6 billion in long-only strategies, a figure that will more than double after the acquisition of SGAM UK is completed. GLG would like to grow that total substantially during the next few years, contending that long-only portfolios, which generally don’t depend on leverage and are much more liquid than hedge fund strategies, are very attractive in the current environment.

The SGAM UK purchase was an all-cash deal, but GLG’s co-CEOs still hope to use their stock to make acquisitions. They believe that having a broad line of products should help stabilize the firm’s share price. Because GLG’s different funds don’t share their economics, if one is down sharply, it doesn’t affect the performance fees of the moneymaking funds. Indeed, GLG had about $5 billion in hedge funds that made money last year, which means they received a performance fee in 2008 and will earn one again this year if they deliver a positive return. The firm can also earn performance fees on any funds that were in the red in 2008 once they get above their high-water marks again.

“This shows the virtues of a diversified model,” says Robert Lee, an analyst who covers GLG for Keefe, Bruyette & Woods in New York. “You benefit from having a diversity of products. It provides some stability.”

GLG is also hoping to expand its asset base in the U.S. and Asia. A year ago the firm began gearing up in the U.S., where it traditionally has had a very small presence, when it registered as an investment adviser. It is targeting public and private pension funds, family offices and insurance companies, emphasizing its European long-short product, which had an annualized return of 10.2 percent from its 2000 inception through September 2008. GLG currently has 20 people in New York doing investment research and calling on potential clients. Gottesman, who splits his time between there and London, says he is considering moving to New York full-time.

In Asia, GLG is focusing on China (it recently opened a Beijing office), Japan and Southeast Asia (where it plans to operate out of Singapore). In these markets, GLG intends to sell both hedge funds and long-only products. SGAM UK is known to have a very strong Japanese distribution business. “There is a lot of money in Japan and China,” says Roman. “In the next three years, there should be good opportunities to push our products.”

GLG also expects to expand in the Middle East, thanks to the firm’s ties to the Dubai government through minority shareholder Istithmar. GLG currently manages money for several of the region’s sovereign wealth funds.

Even as the firm grows and brings in new people with strong pedigrees, Roman and Gottesman are determined to give them, as well as some of the top folks already present, a bigger say in how GLG is managed. Last year GLG formally created a 13-person advisory committee comprising senior management, senior investment managers and analysts from each of the investment teams. The committee determines how resources are allocated, policies for compensation and even whom to fire. Anything that affects the team on a day-to-day basis goes through the group.

“If you bring in guys internally, you get interesting thoughts,” says Lagrange.

Of course, Gottesman, Lagrange and Roman are mindful that the markets — and investors — are still very nervous. There is no guarantee that the money that fled will flow back after the redemption wave subsides. And the firms that put up gates, including GLG, have created ill feelings toward the industry in general. In addition, GLG’s stock, which was supposed to be used to buy other firms and make GLG’s principals and top professionals very wealthy, is kicking around near its all-time low price.

Still, as GLG pursues its bold plans, the team is confident that the worst is behind it.