If Your (Hedge Fund) Employer Goes Public

You work at a hedge fund and are picking up hints that an initial public offering might be on the horizon. Should you click your heels, or make for the exit? Celebrate says one Wall Street observer. Not so fast, counter headhunters who recruit for hedge funds.

The news this week that Citadel Investment Group, a leading hedge fund company, hired away Goldman Sachs' investor relations chief is surfacing talk of hedge fund manager IPOs.

Publicly owned private investment firms - at first blush, a bit of an oxymoron - burst into prominence earlier this year when first Fortress Investment Group and then Blackstone Group staged well-subscribed IPOs. Blackstone is a top sponsor of private equity buyouts, while Fortress operates in both the hedge fund and private equity spaces.

Copycat Filings

Blackstone's $4.13 billion share sale in June inspired copycat filings from at least two other top-tier private equity firms, KKR & Co. and Och-Ziff Capital Management. Several other alternative investment companies, including Carlyle Group and AQR Capital, indicated they were preparing to go public as well. In July, Carlyle brought in as its new CFO a Deloitte & Touche senior partner who had helped audit Blackstone ahead of its IPO.

Then came the recent market turmoil. Many quant-driven hedge funds - including AQR - suffered severe losses while Blackstone's stock fell as much as 32 percent below its $31 initial price. That put a damper on IPO filings by hedge fund and private equity firms.

But now that Citadel hired John Andrews, previously head of investor relations at Goldman, talk is heating up again. Chicago-based Citadel manages $16 billion and its funds reportedly have returned 20 percent so far this year.

So, if your employer goes public, what might that do for - or to - your career?

An alternative investment firm's IPO filing is "probably real good news" for employees, according to Alan Johnson, managing director of Johnson Associates, a compensation consulting firm in New York. He says fund managers that go public "are making it very attractive" for staff through option grants, restricted stock, or similar instruments that provide a deferred payout pegged to future share price appreciation.

Hoping to reap similar benefits, some alternative investment pros are said to be angling to move to firms they think will file to go public once they're aboard.

The Penalty For Being Public

However, the potential isn't uniformly bright. Accounting and operations staff may fare worse if their employer is a public company, says George Yulis, principal at Rothstein Kass Executive Search Group. "It's going to be a lot harder to pay 100 percent bonuses when you have to report to your investors that you paid your accountants 100 percent bonuses," he says.

Yulis cautions that his views are tentative right now. He predicts that pay comparisons between private and publicly held alternative investment managers will fuel a "whisper network" early in 2008, when final bonus numbers are being bandied about. That's when rank-and-file opinions will coalesce as to whether it's better to work for a publicly owned firm or one that stays private. He expects this word-of-mouth will focus on compensation for people at the "guerilla level, the street level," rather than at the level of officers or directors whose pay is reported in public filings.

Public disclosure may also tend to restrain compensation for senior professionals in front office roles, says Sandy Gross, managing partner of Pinetum Partners, a hedge fund recruiting firm. Gross suggests that publicly held management firms may use their own stock or options to "create an annuity that reduces the uncertainty over time of cash compensation." If so, working for a public company would mean a steadier total compensation figure from year to year, but smaller windfalls in times when returns are very strong.

In lean years, public companies face immediate pressure to clamp down on expenses. If a publicly owned fund manager encounters huge redemptions or major losses or shortfalls, Gross says, "outside forces will be raising a flag. The publicly owned firms are going to have to either downsize employees or reduce comp, and report that.... If you're public, it's about those quarterly returns. If you've lost a lot of money, you may have to shed some of that overhead sooner rather than later."

In contrast, managers that remain in private hands can afford to wait it out if they have a shortfall. "There's really a message that these firms value their culture, value their business models," says another recruiter, who asked to remain anonymous. He notes that among large long-only asset management firms, which include several public companies, those with the best reputations are privately held.