Key man risk, defined | FT Alphaville

Key man risk, defined

Ever wondered what it might look like?

Here’s the answer:

Since Gartmore announced Guillaume Rambourg, one of its star fund managers, had been suspended on Tuesday afternoon the share price of the fund management group has fallen almost 45 per cent, or by £190m (at the time of writing).

But is this an overreaction? City analysts aren’t sure.

Canaccord Adams says it is not possible to put a floor on the possible downside:

This event highlights the dangers of fund management models that rely heavily on key individuals, but Gartmore is currently the most obvious offender in the listed space. The risk of redemptions from Gartmore’s funds is likely to extend beyond those managed by Rambourg (c.20 per cent of AUM in conjunction with Roger Guy) and we do not believe it is possible to put a floor on the operational downside. Diversification through either recruitment or acquisition looks even more of a challenge now, given the reputational damage and the weakness of the shares as currency.

Gartmore has £259 million of borrowings (due in 2014), offset by £174 million of cash. The debt is “covenant-lite”, but there may be a risk of Gartmore breaching the terms of its Senior Credit Arrangements if financial performance deteriorates materially. We will seek to ascertain details of the loan terms.

However, Merrill Lynch says investors should not be too hasty as it is unclear what Rambourg is actually being investigated for and what the outcome will be.

It sets out three possible scenarios.


Although there are a range of potential outcomes, we think that there are three nodal points. The first of these is a positive outcome of the investigation, with Mr Rambourg able to recommence his duties quickly. Theoretically, the ex ante value of the company should be unaffected by this, although in reality it is hard to argue that there would not be some minor impact from a loss of management focus for a period of time.


The second is that Mr Rambourg is unable to resume his post, that a quantum of the assets he managed leaves, but that there is no franchise damage beyond this. We have provided some hypothetical order of magnitude estimates for the impact of this, which suggest that on a run rate basis something in the low 20% of PBT would be lost were half of the European AUM to leave, or something in the low 40%s were all the AUM to leave. In connection to this, it is worth pointing out that Mr Guy is arguably better known than Mr Rambourg, and we believe has a considerable personal franchise.


The most severe is that the firm suffers some kind of franchise damage as a result of the investigation. This feels a harsh outcome to an investigation of an individual. One possible response to this could be the company seeking a corporate solution to preserve the value in the remaining business, rather than risk becoming a wasting asset.

Indeed, it is worth noting that Gartmore has been touted as a possible target for Man Group in recent weeks and is now trading at half its flotation price.

Related link:
Gartmore star fund manager suspended – FT