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Rating:Can Neil Hennessy Afford You? Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, May 15, 2014

Can Neil Hennessy Afford You?

Reported by Tommy Fernandez

If you're going to the 2014 ICI GMM Conference make sure you meander along the hallways or hang out near the bars. You're likely going to bump into Neil Hennessy, president, chief executive and chairman of Hennessy Advisors.

He's always good for a story or two or some industry gossip, but if you run a small to medium-size equity boutique, Hennessy might want to talk to you about a deal.

The man is hungry for deals, and has told MFWire in the past that he is interested in acquiring boutiques or funds with up to $10 billion in assets. He has also been making the rounds at most of the industry's shindigs. For example, he had a blast at the ICI Conference in Orlando.

Hennessy and his colleagues have done deals before, seven in total. The firm in 2011 bought five funds previously managed by Linder Asset Management, and, of course, two years ago bought 10 FBR funds with a total of $1.9 billion in assets under management for $28.75 million.

The FBR purchase was notable because it more than tripled Hennessy's AUM at the time to just over $3.1 billion. Hennessy now manages nearly $4.9 billion.

Can he do it again? Should you have a talk with him?

Well, here are some things to consider.

The FBR deal was done in less than two days
You may or may not know the background story behind the FBR acquisition, the deal which many described as the "minnow swallowing the whale," but Hennessy outlined some of the saga for MFWire.

It all started on a Tuesday, with a 6 a.m. call.

Someone from FBR had called, asking Hennessy whether he wanted in on the deal. He said yes. He then asked how much time did he have to put together his bid.

The caller said 10 a.m. that Friday.

Hennessy then asked how far behind was he on the deal. The caller said over a month.

Did we mention that Hennessy was scheduled to go with his wife to Cabo San Lucas for eight days that Wednesday?

"I had to ask myself, do I surrender half of my personal assets to my wife now or can I do the deal?" he said.

So Hennessy and his colleagues started nailing down the details that Tuesday. An initial copy was ready for him when he and his wife arrived in Cabo San Lucas Wednesday. A final draft for the bid was completed that Thursday and mailed to FBR that Friday morning.

That Monday, the folks from FBR called them up to ask whether they could come to DC the following Monday.

"The Street was questioning whether we knew what we were doing. Are we just some unknown entity? We put together a deal in under two days and ended those questions."

Hennessy and Co. were willing to pay good bucks for FBR
The publicized price for the FBR funds was $28.75 million, but if details about the deal outlined in documents filed with the SEC. According to one SEC filing. Hennessy actually made two payments for the purchase:

"an initial payment of $19,692,137 made on October 26, 2012 based upon the net asset value of the FBR Funds as of October 25, 2012 and (ii) a contingent payment of $19,193,595 made on November 5, 2013 based upon the net asset value of the FBR Funds as of October 28, 2013."

That's nearly $39 million for vehicles that ultimately grew to $3.3 billion in assets. Do the math.

The past deals were financed by bank loans
If you look at this SEC filing, you'd see that the FBR purchase led to $30 million in bank debt.

Here's some language from the filing explaining the loan:

(5) Bank Loan The Company has an outstanding bank loan with U.S. Bank National Association. On October 26, 2012, the loan, which then had an outstanding principal balance of $1.9 million, was amended and restated to provide an additional $16.3 million to purchase the assets related to the management of the FBR Funds. The balance of the loan immediately following the amendment and restatement was $18.4 million. On November 1, 2013, in connection with the contingent payment for the purchase of assets related to the FBR Funds, the Company entered into an amendment to the loan agreement with U.S Bank National Association that increased its total outstanding loan balance by $13.3 million to $30.0 million. The amended loan agreement requires 47 monthly payments in the amount of $312,500 plus interest at the bank’s prime rate (currently 3.25%, in effect since December 17, 2008) plus 0.75% (effective interest rate of 4.00%) and is secured by the Company’s assets. The final installment of the then-outstanding principal and interest are due October 26, 2017.

Can Hennessy get more money via bank loans? Maybe. The firm is straightforward on this subject in its 2013 annual.

A crushing debt situation? Hardly. However, this route has seen some healthy use recently.

The firm's books look well rested
Hennessy's earnings have been going to spin class. The firm's total AUM as of March 31, 2014 were $4.77 billion, up 40.2 percent from a year ago.

The firm's total revenue for the quarter ending March 31 was up 39.7 percent, to $8.3 million, from the same period a year ago. Net income was up 57 percent, to $1.7 million.

However, the firm had less cash, $4.1 million in the quarter ending March 31, compared to $8.4 million a year ago.

Hennessy recently moved its shares to Nasdaq
Previously traded Over-the-Counter, the company made the move in late April.

As of December 2, 2013 there were 5,898,756 shares of common stock issued and outstanding, according to SEC filings. With a share price of 12.16 as of 2:23 p.m. Thursday, that translates into a market cap over roughly $72 million.

Why should one care? Stock deals of course!

Ed Higham, a managing director of the investment bank boutique Silver Lane Advisors, had this to say on the subject:

To acquire a mutual fund firms can either pay cash, stock, a combination of the two, or they can seek a buyer willing to take a revenue share deal.  Cash is either on their balance sheet or available from cash flow or borrowings. Whether and how much these firms can borrow is company specific. The ability to use stock will be a function of seller willingness to accept stock as currency and buyer willingness to accept the dilution of issuing stock. Another alternative would be if the buyer is willing to accept a revenue share where the proceeds the seller receives are tied to the revenues generated from the underlying funds.  If the assets and revenues are retained post-acquisition the seller gets paid more, if assets and revenues run off they get paid less. The buyer essentially shifts a large portion of the retention risk to the seller. 

The other related consideration is how motivated the sellers are. If a seller is highly motivated they will be more willing to accept a revenue share deal as the alternative may be they end up with little or nothing if the fund is at risk. Running a mutual fund complex is not an inexpensive proposition in today's world of increased regulatory oversight and  scrutiny.  If a seller is under cost pressure given lack of scale and increased costs, receiving some sale proceeds for the fund will beat the alternative of watching the assets walk out the door.

Consider this, the London Stock Exchange has been able to do serious acquiring damage over the past seven years thanks to stock deals.

Hennessy described his financing situation to MFWire in this way.

I have people calling me up offering money for deals, either private equity or what have you.

Or I could go ahead and issue more stock and do a secondary offering and raise more money for acquisitions. There are a lot of different avenues that I can go.

We just happen to be a in very healthy financial situation.

Hennessy isn't the only ice cream truck in town
As charming as he may be, he isn't the only fundster looking for deals. Value Line's Mitch Appel is in an acquisitive mood. RidgeWorth CEO Ashi Parikh is also a little peckish.

Talk to them all this conference, that's what GMM is for. But make sure you seek out Hennessy, with a drink in your hand. He'll tell you that one about the two guys with the tambourine, or was it the one about the electrician, the plumber and the rocket ship? At any rate, you'll have a ball. 

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