New Starfalls back down to earth

The fund manager founded by John Duffield amid much fanfare in 2000 is in trouble after racking up debt now worth more than 10 times its falling market value. Mathieu Robbins reports
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The Independent Online

The most recent entry on New Star Asset Management's corporate history on its Web site, addressing the first half of 2008, gushes about awards won, profits made, funds launched and senior fund advisers newly hired by the Knightsbridge-based investment manager. The last sentence of the page, crucially, reads "Past performance is not necessarily a guide to future performance." Nothing seemed truer yesterday as the company's shares, which had already lost more than 90 percent of their value since December last year, fell another 43 per cent yesterday.

By the end of the day New Star, the fund manager set up full of billboarded promise in 2000 and listed triumphantly on the London Stock Exchange in 2005, was close to scraping through with a debt for equity swap with banks including HBOS, HSBC, National Australia Bank and Royal Bank of Scotland.

This was founder, chairman and City icon John Duffield's second fund on the same retail investor-focussed, advertising hoarding-fuelled blueprint. He set it up after leaving Jupiter Asset Management, the retail-investor fund that brought him fame then money in the years after he founded it in 1985 until he sold it to Germany's Commerzbank in 2000.

New Star's model is built for the good times. It has expanded quickly but, unlike many rivals, is not part of a larger institution and has racked up a large amount of debt. This stands at around £236m, more than 10 times its market value. It appeals for large amounts of cash from retail investors, and advertises throughout London for their funds.

Like rivals, the company has been hit hard by outflows as clients, spooked by the stumbling economy and recent bad performance, withdraw their money.

Many UK fund managers, including Henderson, F&C and Schroders, have reported outflows in the past month as markets tank and their falling portfolio values make them less attractive.

New Star expanded quickly in the good times and now employs about 370 people. "Revenues for a firm like New Star are a percentage of funds under management so can go down very quickly in these markets," said a leading City investment bank who looks at financial companies. "But the fixed costs are high."

Most of New Star's debt was taken out to return £364m to shareholders, a significant number of whom are employees, in April 2007. Mr Duffield owns about 5 per cent but sold a stake of around 2 per cent at the end of 2007, according to Bloomberg data.

After eight years of trading, the downfall of New Star has been swift.

The company said last month it had accepted tougher terms on its debt after talks with its banks. Under the new terms, the interest rate on New Star's bank debt rose by 1.5 percentage points, giving it interest payments of about £22m a year. But the debt remained repayable in a single payment in June 2013, it said at the time.

Two weeks ago the company said its joint chief investment officer Stephen Whittaker was leaving as part of a reorganisation and that it would also merge some smaller and poorly-performing funds.

And on 25 November, New Star suspended dealing in its International Property Fund, following a surge of redemption requests as global property markets deteriorated.

"They are the last direct-to-retail-focussed player that is not part of a bigger institution," said a second City investment bank insider. "Also they have principally focussed on retail money through directing their fundraising to retail investors and brokers."

Unlike institutional investors who spend time meeting a fund's management team and then sign investment terms which often include a substantial lock-in, retail investors typically come in off the street. They are typically locked in for a shorter period than institutional investors – if at all. This makes it easy for them to redeem their investment.

Last night, some in the City speculated that the banks may try to remove Mr Duffield, known as a maverick used to having his way – before selling the business.

But this would break the heart of the man who created New Star and would want to see it out of its current predicament "as a point of honour" according to a person familiar with Mr Duffield's thinking.

And New Star's debt has been a stumbling block in its discussions with potential buyers, understood to include major industry players such as Henderson and Aberdeen. Entrepreneur Clive Cowdery's latest Resolution vehicle, which is set to list later this month, is also unlikely to make a move for the company until the borrowings have been reduced.

Fund manager sales also tend to be lengthy and difficult to execute as it takes a long time to lock in crucial staff.

The situation yesterday was compounded by a farcical sequence of events which led to an additional 43 per cent being wiped off the value of New Star's shares.

Rather than wait until trading in its shares had stopped, New Star jumped the gun and issued a statement before markets opened saying it had asked for a suspension of trading in its shares. It then had to embarrassingly make a second statement two hours later saying the UK Listing Authority had turned down its share trading suspension. These statements led to a run on its shares as they braced the market for bad news.

In a tragic mix-up New Star, which had been informally liaising with the UKLA about suspending its share trading, had not received an explicit refusal at 7 am, so assumed there would be no opposition and issued a statement an hour before the start of trading.

However, once a formal request was made the UKLA decided this did not fall into a valid category for such trading stops and the agency, which will not suspend trading in a security with the goal of fixing its price at a particular level, refused.

"A suspension had not been formally requested when New Star made the announcement of the request," said a spokeswoman for the Financial Services Authority, which the UKLA is part of. "Following the request, the FSA reviewed the request and found there was no case for a suspension."

Rivals should maybe take note how not to communicate in case they need to do the same themselves. Indeed, as the whole industry faces the same pressures of falling asset values, redemptions and banks raising barriers on access to debt, New Star is unlikely to be the last fund manager forced to its knees by the credit crunch.

"New Star is closest to the edge and is possibly just the first to get tipped over it," said the first banker.