The Luxembourg Financial Group: Why did UBS buy it?

LFG, a successful structured products boutique, has just been snapped up by UBS. What does the Swiss banking group stand to gain? Luisa Porritt reports

UBS had its reasons for acquiring Luxembourg Financial Group (LFG), a boutique asset manager. Yassine Bouhara, UBS’s co-head of global equities said in a statement that the acquisition would boost its existing structured product offering. But why did LFG, on track to becoming a highly successful boutique manager, allow itself to be taken over so soon after launch?

In its short lifespan as an independent boutique, the LFG has earned an enviable reputation thanks largely to its Ucits fund distribution platform. A measure of its success is that LFG won business from a number of blue chip names in the hedge fund sector. Within the space of eight months, London’s Sabre Fund Management and RAB Capital, New York-based CastleRock Asset Management and Act II, as well as Singapore’s Quant Asset Management all signed up to distribute funds via LFG.

Set up in 2007 by a group of former Deutsche Bank employees, LFG sought to offer a more independent service than that given by a large investment bank.

To assist the launch, LFG secured backing from a number of banks, including Deutsche Bank AG, M.M. Warburg & Co KGaA and Feedback AG, which each took a 5% shareholding on 2 April 2008, giving the firm additional capital of €10,491,108.

In just over a year and a half between the firm’s launch and the opening of its flagship Ucits platform, LFG made eight senior hires to its team, with strong backgrounds from large names including JP Morgan, Morgan Stanley, Merrill Lynch and Deutsche Bank. It opened three offices, in Luxembourg, London, and Stamford in New York. Seven funds marketing to different regions across Europe were launched, and two platforms, including a German one and a Shari’a-compliant issuance platform.

But the opening of its Luxembourg Alternative Ucits Platform (LAUP) at the end of November 2009 was what brought the Group a wave of new business and exposure. Managers that formerly signed up to the LAUP platform offer nothing but praise about the people behind LFG, noting their intelligence, experience and in their view, deserved success.

Several hedge funds chose to use the platform to launch Ucits-compliant versions of their flagship offshore funds. This year, LGF had lined up three more, including a fund from emerging markets specialist RP Capital, based in the UK, and an FX fund from Cornhill Capital, also in London. German investment manager Fortinbras, meanwhile, planned an index-linked fund trading on fixed income currency and commodities markets.

Seizing opportunities

Yet, despite such a promising start, LFG has been acquired by UBS, and now sits in its global equities division. UBS had realised the advantages of owning LFG and on 14 April seized an opportunity, paying $36.2m. The Swiss bank said the acquisition would enable it to expand its business in global equity derivatives and synthetic equities, and it is understood some of LFG’s staff will move across to that division. But analysts say UBS’ motivation must have been the opportunity to win further business through the LAUP platform – a service it did not previously offer – at a time managers are increasingly becoming alert to the need to launch onshore products.

Head of hedge fund solutions at LFG, Gareth James, describes Ucits as a “transformational wrapper for the hedge fund industry, and recognition that distribution will require a different approach”.

Part of LFG’s success with investors was down to its refreshing approach to transparency, in an era when hedge funds are still working to throw off the taint of obscure management fee structures and links with Madoff. “It’s a chance to correct that and offer some good, liquid funds. It’s an opportunity to have a rethink,” says James.

As for the managers, LFG has been attracting small and large hedge funds alike, with a range of strategies.

“We believe in Ucits. We were an early adopter and the first US manager with an Ucits offering,” says Jamie Lewis, director of investor relations at CastleRock, which has $800m in AUM.

As much as $7.8trn of capital has been poured into Ucits funds. But as yet, absolute-return strategies make up only 1% of that, according to a recent Deutsche Bank survey.

With end investors driving the movement towards Ucits, managers are becoming more interested and seeking expertise from the likes of LFG. When asked why CastleRock went for the LFG ­platform, Lewis says: “We wanted an independent ­structure to offer the best solution for our clients, whereby you can pick and choose service providers. “You don’t have to change the investment process, which is something clients were demanding. The Ucits offering has a higher probability of capturing ­institutional investors in Europe.”

Keeping the core intact

Will moving an independent provider within the ­framework of a large investment bank put the success of LFG’s model at risk? George Cadbury at Merchant Capital (pictured) – the Ucits umbrella of Merchant House Group that he ­co-founded and which runs its own Ucits structuring – does not think so.


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