Jeremy Warner: New Star in meltdown as shares plunge

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Outlook: As founder of first Jupiter and later New Star Asset Management, there is no doubting John Duffield's talents as a serial entrepreneur and money maker, yet the skids have been under his once buoyant share price for more than a year now. After yesterday's calamitous attempt to suspend trading in the shares, they have become worth little more than option money.

Bankers are likely to exact a heavy price in the debt-for-equity swap now under negotiation, and whereas there is an outside chance of Mr Duffield's old friend, Martin Gilbert of Aberdeen Asset Management, coming up with a counter-proposal, it's unlikely to be worth very much more than whatever the bankers come up with.

Where Mr Duffield went wrong was in borrowing more than £300m at the top of the market nearly two years ago to finance a £363m repayment of capital, worth 125p a share. At the time, leveraging up the balance sheet was all the rage, and everyone thought it a great idea. They had forgotten about just how operationally geared fund managers are. If the stock market halves, then, all other things being equal, the manager loses half his fee income, which is charged as a set percentage of the value of funds under management.

That's left New Star struggling to pay the interest on the debt it took on to finance the capital distribution. Yet yesterday's dénouement was in truth only the culmination of a series of calamities.

In short order, Mr Duffield has got through no fewer than three chief investment officers, including only two weeks ago Stephen Whittaker, manager for New Star's once-popular UK Growth fund. Mr Whittaker's mistake was to stay long of banks right through the credit crunch meltdown.

The resulting underperformance was monstrous, and so severely damaged New Star reputationally that even when markets do begin to recover, it is not certain the company will benefit with renewed inflows of saving. New Star was also recently forced to close one of its property funds to redemptions after a rush by investors to get their money out.

Not that anyone should feel too sorry for Mr Duffield. The 125p-a-share capital distribution not only gave him a massive cash payout on his then substantial share stake, it also provided him and other members of staff with a handy way around lock-in agreements, enabling them to sell down their holdings at close to the top of the market. All told, Mr Duffield managed to take £150m out of the company. From the point of view of shareholders around at the time, the distribution may not have been such a bad idea. You probably wouldn't see 125p in the shares today even if the company had no debt.

Yet for the fools who bought, believing that shares about to return a third of their value had to be a good deal, it's been a disaster. Always best to remember that when companies gear up to make big cash distributions, they are only paying their shareholders with their own money.