By Robin Eggar, Principal of MBD Communications
A few weeks ago Volkswagen’s brand was valued at $31 billion. Now apparently it is worth a mere $21 billion. How – beyond the opportunity for shorting VW stock or having to explain away the 30% fall in the share price in this month’s investor newsletter – is this relevant to hedge funds?
Most hedge fund managers wouldn’t include the word “brand” anywhere on their balance sheet let alone give it a monetary value: a value of $20 billion on one side, close to nothing on the other. Of course there are obvious differences between a global retail brand and a niche alternative investment manager, but the gulf is not as wide as you might think.
For hedge managers, especially start-ups, their brand is their single most valuable asset. They just don’t recognise it.
In their annual accounts most large companies list “goodwill” as an asset with a true value alongside cash reserves and unsold inventory. Like intellectual property rights and patents, but unlike offices and factories, goodwill is almost impossible to measure accurately, but what it boils down to is a quantification of the value of the company’s brand.
In the middle of 2015, VW was listing its intangibles at $67 billion or 16% of its total assets. The emissions scandal is threatening to tear the heart out of those assets.
“At Brand Finance’s last calculation VW’s brand value stood at just over $31 billion, making it the world’s third-most valuable auto brand. It appeared to be motoring ahead, brand value having increased from just over $27 billion in 2014. The developments of the last few days will undoubtedly send this trend into reverse, resulting in $10 billion in lost brand value,” said Brand Finance CEO David Haigh.
Brand Finance, just in case you didn’t know, claim to be the world’s leading brand valuation and strategy consultancy, with offices in over 20 countries. As VW are discovering the hard way, brand value is an artificial construct, calculated by external perception, or a belief of what it is worth.
What is the brand perception of a hedge fund manager based on? Among other things:
• Track record (past performance may not be an indication of future performance but it sure as hell helps.)
• Industry presence
• Media profile
• External presentation – logo, investor materials, website etc
But in the end, it all boils down to just one word:
In the Man Group’s 2104 accounts they list their goodwill and other intangibles as worth almost $1.6 billion, the largest single item on their total assets balance sheet. Very few hedge funds are public companies, preferring partnership or limited company models, which means few need to put a public value on intangibles and therefore are unlikely to think about it.
Because hedge funds don’t tend to own much physical stuff beyond a Mayfair office lease and a bunch of computers, their measure of success is invariably their total AUM.
Man’s accounts recognise that when you are selling non-physical financial services one of your most valuable assets is your reputation to the outside world, in other words your brand. It is this that helps to attract the all-important assets to manage.
It has been a long time getting there for Man but they have learned. For many years they sold double branded structured products – Man Group and AHL – and there was further confusion about where their other acquisitions sat. The image of their fund of fund business RMF never really recovered from its association with Bernie Madoff (now there is a VW moment for you) and after merging with another FoF brand, Glenwood, has now vanished into the mists of history. Man’s product branding is now clean, precise and effective: Man AHL, Man GLG, Man Numeric, Man FRM. The Man Booker Prize is another indicator of a company that truly understands the importance of brand.
A great historical example of how new hedge fund managers borrow brand power from their previous employer is Julian Robertson. After he shuttered Tiger Management in 2000 he seeded some of the managers who had worked for. Some of those “Tiger Cubs” which include Chase Coleman’s Tiger Global Management, Stephen Mandel’s Lone Pine Capital, and Lee Ainslie’s Maverick Capital, became hugely successful and manage total assets north of $30bn. Robertson has seeded some 50 funds and on his return in 2010 launched some Tiger fund of funds. His sprinkling of brand fairy dust convinced two US state pension funds to invest hundreds of millions. Subsequent performance resembled frogs not princes.
Highbridge is another premium brand that has a good track record of team spin–outs that capitalize on the original brand. The $2bn event-driven Ionic was started by Bart Baum and other Highbridge alumni in 2006. In 2014 Pagoda specializing in long/short technology, media and telecommunications equities, was set up by a trio of Highbridge managers with AUM of $200m.
So how does a start-up hedge fund attract AUM? There is no track record therefore no Morningstar rating. There is only what the portfolio manager and his team did before, somewhere else; their promise of cleverer algos; and better systems. Seed investors, early adopters go in because of their past reputation. Salesmen sell on the basis that what they did differentiated themselves from the others doing the same thing. They sell the brand.
Now tell me that your brand isn’t worth a dime.
However if you don’t understand, value, build and cherish your own brand how can you expect anybody else to?
About the author:
Robin Eggar runs MBD Communications, a strategic marketing and communications consultancy specialising in alternative asset management. Previously he was Director of Communications and Public Affairs for Winton Capital Management.