Morning Coffee: How to show your new traders $1m each worth of love. Hedge funds are looking for people with experience of extreme trauma

“Integration begins with our first conversation, before we even come up with a valuation”.  It sounds like Larry Fink of BlackRock might be freestyling lyrics for the most boring Christmas rap video ever, but he’s actually describing his process for making acquisitions. 

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BlackRock recently bought private credit manager HPS Investments, and took over Global Infrastructure Partners earlier this year.  Both of these deals brought in a few hundred billion dollars of assets under management (which is a lot of money, but not necessarily a lot of money for BlackRock). But much more importantly, they helped Larry Fink extend the product range into private credit, and to do so considerably more quickly than he would have been able to by hiring people and building a business internally from the ground up.

But of course, this strategy only works if the investment talent sticks around.  Or as Larry Fink might put it, to maintain the motivation the integration conversation has to cover the remuneration situation.

The remuneration situation seems to have been intense. In the HPS and GIP acquisitions, the retention cash was substantial indeed. A BlackRock presentation to analysts and investors puts it at $1.3bn.  That’s a bit more than 5% on top of the total cost of the deals themselves (HPS was $12bn and GIP $12.5bn).  It’s also an average of $1m per employee acquired. And not only will managers get this retention money, but they will also continue to earn carried interest on their existing funds.

Of course, the extra retention payments aren’t cash up front – there would be no purpose to them if they were.  There's a five-year vesting schedule. The former owners of HPS and GIP are taking the acquisition consideration in the form of BlackRock shares, and retention payments are likely to be similarly structured. Everyone’s interests are aligned.

Well, their financial interests are, anyway.  Because,although these payments are always necessary, the retention of key staff is almost never purely a matter of paying up.  Anyone who is worth retaining, particularly in a sector like private credit, is likely to already have “walk-away money”, and even a million dollars might not be an insurmountable obstacle to a competitor who also wants to grow.  The only real way to make people stay at a job for the long term is to keep them happy, and happiness at work for elite fund managers is often a matter of management style and personal ego rather than simple finance. 

Or as Larry Fink might put it, the remuneration conversation is a consideration, but the elimination of frustration is just as important if the oorganizationwants to avoid resignation.

Elsewhere, you might not think to compare the “extreme trauma seen by the medical profession” to “draw downs on the trading floor”, but Freddie Stacey of executive search firm Sheridan Executive is willing to go there.  He was trying to explain some of the reasons why hedge funds are increasingly turning to doctors and medical scientists as a new talent pool.

Obviously, the main reason why this is a hot hiring sector is more to do with the extremely strong performance of the pharmaceuticals and medical technology sectors over the last year, which has left long-short equity funds wanting people who know how to read drug research and potentially gain an edge in spotting the next Ozempic. But it probably also helps that having seen genuine life and death situations at close quarters gives you a sense of perspective when it comes to winning or losing a bit of money in the markets.  And having been through medical training, they’re probably good at going for long periods without sleep.

Meanwhile...

Some scandals simply refuse to die.  Five years ago, Citi fired its sales traders in Hong Kong over the “IOI affair” (basically, trying to win block trades by pretending to have client orders ready to match).  This has resulted in a number of regulatory actions and fines, but several of the former employees are still in litigation, claiming that Citi dismissed them unfairly and that they were acting with knowledge of management. (Bloomberg)

Another realignment from the reorganisation at Citi – Chris Miller has left his position as vice chair of energy investment banking, and will be joining Lazard. (Reuters)

Brian Benari, the CEO of Barrenjoey has one of the trickiest tasks in investment bank management at the moment.  The Aussie superboutique has had a not-so-great year, and so he’s in the position of explaining that revenues are about to pick up, and so rainmakers should hang on for a great next year, rather than accepting the numerous offers that rivals are making.  It would be helpful if there was a proverb that meant the opposite of “a bird in the hand is worth two in the bush” (AFR)

Partners who aren’t partners, Managing Directors who aren’t managing directors and Material Risk Takers who don’t take any material risks.  As well as changing the rules on bankers’ bonuses, the Bank of England appears to be clearing house a little bit with respect to investment banking title inflation. (FT Alphaville)

When an employee leaves after a decade and then sets up as an independent consultant whose only client is his former employer, that will already be raising eyebrows at the compliance department.  If that employee’s nickname is “Mr Non-Compliant”, as an unnamed business development partner for Trafigura dubbed himself, that’s even worse. (Bloomberg)

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