Remember the fallen financial rock star Hamish Douglass? He has a final act
When rock star investor Hamish Douglass famously dropped his guitar and walked off stage at famous fund management group Magellan few years agoThe support group failed to hold an audience, and the money manager’s funds under management fell precipitously.
But Douglass made one big smart investment during his time at the top: having Magellan set up an independent investment bank called Barrenjoey, in which he held a 36 percent stake.
And in just five years, Magellan’s investment turned into a quadruple investment. For Magellan, the $1.6 billion merger with Barrenjoey, announced Monday, represents a new action.
Douglass has long faded from public view, but this single investment may be enough to at least partially salvage the legacy of the onetime investment messiah, who at his peak preached to thousands of retail followers in concert-sized venues.
Magellan nursed the Barrenjoey baby with $150 million in startup capital, but this corporate baby has now outgrown its parent. So Magellan’s reunion announcement represents a family reunion.
However, the situation has turned. Barrenjoey no longer needs Magellan; Magellan needs successful Barrenjoey.
Magellan needed celebrity attention (and growth in his earnings) to boost his performance and shed his moribund image. Four years ago, Magellan had approximately $120 million in funds under management; this amount dropped to $40 million.
And Barrenjoey comes with its own set of investment banking celebrities: Matthew Grounds and Guy Fowler, while not household names, are about as close in business and financial circles as you can get to rain dealmakers and networkers.
Five years ago, the pair excitingly left investment bank UBS and set out to build this new investment bank in an already crowded market dominated by local subsidiaries of major US and European investment banks and our local success story, Macquarie.
The way this merger is designed, Barrenjoey staff will own approximately 31.7 percent of the enlarged Magellan. Most of the rest will be held by existing Magellan shareholders, with Barclays retaining a small stake.
The largest individual shareholders will be Grounds and Fowler, who will be handcuffed to the organization through their shares, which are subject to an unusually long nine-year escrow.
It remains to be seen to what extent the pair will maintain its patches over the remaining decade or so. However, shareholding will provide many incentives.
At least there will be an exit path for its shares in the mid-2030s.
Investors in Magellan are increasingly interested in their stake in fast-growing Barrenjoey rather than Magellan’s fund core management business. Over the past five years, Magellan’s share price has fallen more than 77 percent.
Although Magellan’s fund management business was struggling, Barrenjoey’s profits almost doubled in the six months to December compared to the previous period.
While there are no real synergies in combining the two companies, the inclusion of Barrenjoey’s high earnings growth profile and Magellan’s larger balance sheet would mesh nicely.
The combined group will also have a more diversified earnings base, especially given that investment bank earnings can be more volatile overall.
How investors view the deal won’t be clear until Tuesday, when Magellan shares resume trading. But it could provide a real test of Grounds and Fowler’s M&A credentials.
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