Just How Does an IPO Harm Fund Investors?
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Monday, October 04, 2004

Just How Does an IPO Harm Fund Investors?

Now that the Cohen and Steers IPO is out of the gate, attention is turning to Calamos Asset Management. The fund firm and asset manager has filed its S-1 and is set for its own IPO. Indeed, the offering catches the attention of the Wall Street Journal, but not in the way IPOs usually catch the eye of the paper. Rather than cover the merits of the business and whether Calamos is a buy, the paper questions whether fund firms should be public at all.

The direction of the article is best summed up by a quotation from Mercer Bullard, a former SEC staffer turned fund investor advocate and professor.

"Typically, a company going public is not a good thing for fund shareholders," he is quoted as saying.

That is about all the proof of the case the paper offers up for its theory that fund advisors going public is an idea that should worry fund investors. On the other side, it offers quotes from Robert Steers and Neil Hennessey (Hennessy Advisors IPO'd in 2002).

Why should fund investors be scared an IPO? The article states that:

"The problem is that fund investors and shareholders of advisory firms have different and, at times, competing, goals. Fund shareholders want their funds to perform well, which means keeping fees low and closing funds to investors before they grow so large that they have trouble putting the cash to work. Shareholders in an advisory business want to maximize profits, and profits come from fees charged to fund shareholders. Since fees are calculated as a percentage of assets under management, these shareholders also have an incentive to want funds to continue to grow."

That conflict, and it is a real one, is irrelevant to an IPO. Even a privately owned firm (or a partnership for that matter) has owners whose interests differ from those of the fund shareholders. Selling shares to the public does nothing to increase that conflict in and of itself. Indeed, by going public one could argue that the affairs of the fund advisor will be conducted more openly, exposing some of those conflicts to additional scrutiny that could keep them in check.

Perhaps the paper is implying that executives of public fund advisors are more likely to pander to shareholders than executives at privately owned fund firms. But it does not argue that case explicitly.

Finally, the paper throws out a red herring in the form of a quote from James Bodurtha, an independent director of Merrill Lynch mutual funds and chairman of an independent directors' group about "what companies plan to do with the money they raise: 'Just pay it over to management, or are you going to use the proceeds to build assets?'"

Unfortunately, the reporter fails to explain why how the fund advisor spends its IPO proceeds effects fund shareholders at all.

So what it going on here? It appears that rather than take the time to understand the fund business (and how it really effects shareholders), the Wall Street paper of record has chosen to blindly pursue shareholder advocacy. Keep that in mind next time one of their reporters calls.

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