Stephen Bartholomeusz
Unravelling Babcock fine-print
The proposals from two of Babcock & Brown’s listed satellites to buy out their management agreements should provide a rare glimpse into the detail and workings of the controversial arrangements.
Last week Babcock & Brown Communities (BC) announced it had agreed to pay $17.5 million to acquire the 10-year management agreement held by Babcock & Brown. Babcock & Brown Capital (BCM), after conducting a strategic review, said it had started similar discussions about the internalisation of its management.
Those management agreements, which are generally accompanied by separate financial advisory agreements, are commonplace in the listed specialist funds sector. Macquarie Group and Allco are among others to have used them to cement their effective control of the vehicles – and to protect lucrative fee streams.
BCM, for instance paid more than $40 million in management and advisory fees to Babcock & Brown last financial year.
The agreements have generated controversy because of their opacity, their duration and the way they entrench the managing entity and act as a poison pill and deterrent to takeover, regardless of the performance of the fund.
Typically the management agreements run for a decade or more – they can be 25 year agreements – and are used in conjunction with exclusive financial advisory agreements to generate base fees, performance fees and a stream of transaction-related fees for the fund’s sponsor.
Investors hadn’t been particularly perturbed by the lock-ups of the management of the listed funds until the credit crisis hit. Until then there was plenty of value to be shared and the performance of the funds muted most criticism of the arrangements.
The implosion in the value of the funds as the crisis has developed, however, has provided a focus for increasing scrutiny and agitation as investors have realised that the agreements can frustrate any structural attempts to respond to the decline in asset and security values.
The BBC negotiations, for instance, were a response to approaches from several parties to buy the group, which owns and operates retirement villages and aged-care homes. BBC couldn’t respond to those approaches without either buying the management agreement or gaining Babcock’s agreement to sell it to a third party on terms that wouldn’t deter a bid.
Given that the buy-outs being proposed are related-party dealings, they will have to be approved by security-holders and presumably opined upon by an independent expert. It is that process that ought to provide a better insight into the detail of the agreements and how they relate to each other.
Whether that insight is as detailed as some critics of the agreements and the level of disclosure of them would like is, of course, another matter.
Institutional governance advisor, RiskMetrics, has been particularly critical and has argued that it should be a pre-condition of the listing of funds that they reveal all the agreements and arrangements with their sponsors/managers in full.
The ASX recently issued a guidance note on management agreements, but the thrust of the note was to "encourage" rather than mandate detailed disclosures and release of the full agreements and the exchange emphasised that it didn’t want to limit the flexibility of the entities to enter agreements that they believed were beneficial.
It also said it recognised that some parties might want to protect the "intellectual property" inherent in management agreements. Some cynics might say the exchange is concerned that a tougher disclosure regime might discourage promoters from listing their funds and providing fees and turnover for the ASX.
It is apparent from the market’s treatment of the listed satellites of all the big specialist funds management groups that the poor disclosure and entrenchment issues aren’t helpful in a highly-stressed environment.
There is now more upside than downside for the fund investors, which usually include the managers, in reassuring investors that the fees structures and broader relationships are commercial and in the interests of the funds as well as the managers.
Babcock & Brown presumably is mindful that in capitalising the value of its management agreements for two of its satellites, it will expose its wider arrangements to significant scrutiny.
Having gorged themselves on fees during the good times, one assumes exiting managers will err on the side of generosity (towards the funds’ investors, not the managers) as they exit with their final fee.
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