Jousting with the colourful HFA and MFS boys

January 8, 2008

Listed Australian asset manager HFA Holdings has agreed to pay $730 million for a US hedge fund called Lighthouse Partners such that the combined operation will look after $9 billion globally.

It's amazing what a couple of youngish white show brigade types can achieve tapping Australia's 15,000 financial planners – 2500 of whom actively feed the HFA investment products on a regular basis.

There were three members of the Mayne Report Rich List attending the HFA Holdings AGM at The Radisson on Friday - MFS managing director Michael King, HFA chief executive and largest shareholder Spencer Young and MFS director Paul Manka, a tough looking fella who got his start as a Gold Coast financial planner.

King looked like he had a bad hangover and declined to answer my question about how much time he had for HFA given all the juggling with MFS.

Spencer Young speaks at a million miles an hour but the Harvard MBA did seem quite impressive. His personal relationship with Lighthouse Partners' baby-faced boss Sean McGould, a Young President, sounds very special and when asked for the history he explained that it all started in Chicago back in 1999 when he was looking for an American to run some Australian money.

Young and his financial planner mates have since funnelled $3 billion into the Lighthouse funds which have out-performed most competitors on the Australian market, hence the $1 billion-plus market capitalisation the merged group will enjoy when the deal closes next month – three months earlier than originally planned.

I was the only shareholder who spoke at the AGM and managed to fire half a dozen questions which generated about 20 minutes of debate.

At this point, it is worth going back and reading this Crikey account of the November 6 MFS AGM when new chairman Andrew Peacock was put through his paces and Michael King revealed that UBS has an $800 million loan exposure to MFS for its rapidly assembled Peppers hotel business which controls 15,000 hotel beds in Australia but is now not going to be sold to private equity firm CVC.

This is where it gets interesting because since then, CVC's ultimate parent, Citigroup, has got into real strife from the sub-prime write-downs and had to be bailed out by a Middle Eastern oil state.

The same thing happened to UBS, which took another $US10 billion hit last week and then leapt into the arms of the Singapore Government which pumped $US9 billion into Europe's most prestigious investment bank.

Asked to explain the HFA relationship with UBS, Spencer Young was keen to talk up the hedge fund's diversified global funding options, but it was clear that UBS has been key to the growth of HFA, just like it has been for its sister company MFS.

Whilst UBS has well in excess of $1.5 billion to the various MFS and HFA corporate and investment vehicle entities, HFA will be just fine if its 90 investment professional around the world can continue to deliver above average returns. After all, funds management is a winner takes all game and the financial planners who drive the allocations of tens of billions of dollars will continue to support HFA-Lighthouse it whilst the returns and commissions are both good.

The same might not be the case for MFS which is carrying too much property-related debt, something that is going to hit Centro Properties for six later today when its shares resume trading. The sub-prime tornado is getting worse and this might explain why Michael King looked like death warmed up on Friday morning, hunching over his chair and only stopping to mumble a few brief words when leaving the Radisson.

Whilst HFA is a separate vehicle, MFS has been its largest shareholder in recent years, although the Lighthouse deal will dilute it down below 15%. This remains in escrow but don't be surprised if MFS requests some relief from the HFA board to offload the parcel and pay down some of that UBS debt.

Given the recent institutional raising to fund the Lighthouse deal, I also suggested it was time to find at least two highly credible independent directors to give HFA a new sheen of credibility. Spencer Young said he and Sean McGould usually sort everything out within five minutes and he didn't see the need to find credible Australians as HFA was now a global business that would probably look offshore to strengthen the board.

Hmmm, a headstrong CEO who doesn't really believe in the oversight of non-executive directors. Not a good sign. Then again, Spencer features below on our Mayne Report Rich List and his record to date has been impressive. He's one to watch - for potentially good and bad reasons.