Citadel Considering IPO

By Emma Trincal, Senior Financial Correspondent
Tuesday, September 18, 2007

CHICAGO (HedgeWorld.com)�Despite a difficult market and a supposed closing of the window for initial public offerings, some large alternative investment managers are still seeking to issue shares on the public market, following the lead of two landmark deals earlier this year. Now Citadel Investment Group LLC, the $16 billion Chicago-based alternative investment powerhouse run by Ken Griffin, is considering going public.

"The diversification and the institutionalization of Citadel are becoming more prevalent," said a person familiar with the hedge fund's operations. "And it's fair to say that going public is the direction that Ken [Griffin] wants to go."

The speculation, first reported by Fortune magazine, was sparked by Citadel's hiring of John Andrews, Goldman Sachs Group Inc.'s head of investor relations. A spokeswoman at Goldman confirmed Mr. Andrews' departure from the investment bank, and a Citadel spokeswoman confirmed that Mr. Andrews had joined the hedge fund as a managing director, declining to elaborate.

"Why would they hire an investor relations professional?" said Joel Levine, an analyst at Moody's Investors Service, who said he was not aware of Citadel's plans. "I would imagine that if you're a hedge fund planning to go public, you would want someone that has first-hand knowledge on how to deal with public shareholders because these are different constituents than the investors you deal with in your fund."

Moody's does not have a public rating on Citadel's debt, but it rates the firm's operations.

Why would Citadel want to go public, and why now? The first IPO this year�Fortress Investment Group LLC in February�was considered by many to have come at the best time. The firm received a good valuation at $18.50 a share Previous HedgeWorld Story. The second, and so far the last, such IPO was The Blackstone Group LP's offering in June. Blackstone's entrance into the public market was viewed as opportunistic, as well. At $31 a share, some said the deal was overpriced. But it turned out to be good timing nonetheless, occurring just before the market began to destabilize Previous HedgeWorld Story.

Since then, investors have shied away from risk while an unprecedented flight to quality has pushed Treasury yields to new low levels. Financial industry stocks have also been hammered amid concern about the fallout from the subprime mortgage debacle. Some players, such as AQR Capital Management LLC, which was reportedly considering filing for an IPO, postponed their plans as a result.

It might seem counterintuitive to consider an IPO in this context, unless one decides that going public now is the right move at the right time. Now that fall is approaching, it may be time to revisit the idea that the IPO market has shut down, said Francis Gaskins, IPO analyst at IPODesktop.com, a Los Angeles-based research firm. The IPO market is generally dormant between mid-August and mid-September, he said.

"The IPO window has not really shut down. In the last four weeks, you've had $9 billion of new IPO money that have been filed," said Mr. Gaskins. "The IPO pipeline, and that may sound surprising, is still very healthy. These investment bankers wouldn't waste their time filing for IPOs if they didn't think that there is not a solid appetite for those deals."

What will determine whether a firm hits the IPO market at the opportune time will ultimately be its performance. "The window closes for companies that have a poor one or two quarters prior to the IPO," said Mr. Gaskins. "Lately, it's pretty much a �what-have-you-done-for-me' environment."

Poor performance isn't generally an issue for Citadel. In fact, its considerable reputation is founded on top returns. Including the month of August, so painful for so many top-notch quantitative managers, Citadel's aggregate performance was positive 18% for the year.

The firm is considered one of the best, and as such, is unlikely to run out of cash from its investors. Citadel is known for using its large cash reserves judiciously and at opportune times, making distressed and contrarian investments that end up paying off. In June, Citadel bought the credit book of Sowood Capital Management LP just when the fund defaulted Previous HedgeWorld Story. Mr. Griffin did the same last year when his firm purchased�along with JP Morgan�the energy portfolio of Amaranth Advisors, the hedge fund that blew up in September 2006 due to bad natural gas bets.

In December, Citadel put forth an innovative capital-raising idea for a hedge fund when it announced that it was issuing up to $2 billion in medium-term notes via a private placement, a first in the industry. Thus far, Citadel has only issued $500 million of the $2 billion in notes that constitute its medium-term note program.

And so, does the giant firm, which by some estimates has grown from $12.75 billion in assets in December to $16 billion today, really need the cash an IPO would provide?

"If a hedge fund like Citadel goes public, it's not about liquidity," said Mr. Levine. "To go through the cost of an IPO and the trouble of filing with the Securities and Exchange Commission just to raise liquidity in a fund, while you already have a medium-term note program, seems like an expansive proposition," said Mr. Levine.

But the debt market may not be so accessible right now. Spreads have widened due to the credit crunch and as a result investor appetite for corporate debt has lessened. Liquidity may be easy for Citadel to come by as a fund manager, but what if it plans on expanding into new business areas?

"These guys can never have enough money. They make money by investing money," said Mr. Gaskins. "I think if Citadel goes public, it would be due to Ken Griffin's desire to become a long-term player. Their basic model is quantitative investment, and they've done quite well while others didn't. Their performance allows them to really stand out from the crowd and maybe that's a good opportunity for an IPO."

Steven Davidoff, assistant professor of law at Wayne State University in Detroit, agreed. "Hedge funds are not like private equity and equity investments generally," he said. "Hedge funds can make money even in down markets, and perhaps Citadel is still profiting in the market turmoil. Going out now with good numbers would make for a strong showing."

Citadel may also be considering the IPO route for traditional reasons. "The factors generally driving fund advisers to go public, such as the desire of these managers to monetize their equity interests, may be a factor here," said Mr. Davidoff. "Even if Citadel is not going to get a price like Fortress they can still cash out and monetize an ownership interest."

The general view that owners of a hedge fund that goes public get a lot out of the deal�as they can see a big payday without having to take money out of the enterprise�is usually valid. Citadel is probably not an exception.

But there is more to the Citadel story.

Citadel has demonstrated that it can diversify away from the hedge fund business model, evolving in a way that makes it look more and more like a bank.

Earlier this year, Citadel created Citadel Solutions, a back-office platform for third-party firms including other hedge funds. As part of this new business, Citadel also launched a fund of funds called Citadel Alternative Asset Management Previous HedgeWorld Story.

An indication that Citadel Alternative Asset Management is growing is the fact that Bryan Locke, who used to handle public relations out of Chicago for Citadel, has just been named chief operating officer for the fund of funds business and will relocate to New York. Citadel has also been running securities lending operations for quite a while.

All these different businesses give Citadel a diversified profile and both reinforce and legitimize some of its new ambitions. "If you're aspiring to be in the big league, going public gives you more options," said Moody's Mr. Levine.

"Citadel is becoming more and more like a traditional Wall Street firm, and Ken Griffin wants to pattern himself after Goldman Sachs," said Mr. Gaskins. "Goldman does money management, alternative investment, investment banking and trading. I'm not sure what Griffin's priorities are but he wants Citadel to be a junior Goldman Sachs."