ARA

Investors never learnt ....

There is no value investing in any fund management companies. Ideal structure for them still partnerships.

They are usually listed during boom times. Windows for the fund managers to cash out big time and retire. After cashing out, usually there are significantly less incentives to run business well to share fees with public investors. But more incentives to have corporate perks.

Examples are the guys that are listed during the dot com boom (all of them in the US), where are they now ?
Look at Blackstone in US and 3i in UK; prices have fallen like a rock and most of their LBOs have sunken. With credit tightening and deleveraging, solid historical returns mean nothing now.
Wake up ...

Yes, applies to non-fund management company as well; but more so for professional services.

Because of the exceptionally large agency costs between the shareholders and managers. Shareholders of these companies usually take the last bite of the cherry. Managers usually take unproportionally large amount of the profits of the firm compared with the shareholders; but with no or little risks. That is why, a partnership structure is more suitable.

One of key function of IPO or public market is to raise large capital efficiently to expand busines; otherwise the entreprenuer himself has to self-fund business. Hence, a strong and efficient capital market is important for an expanding economy.
But for a fund mangement company, what does it need so much IPO proceeds for ? Only encourages corporate perks and early retirement.

Ucypmas is spot on in theory how you should value ARA Asset Management. Of course you can also factor growth in the form of projected new REITs contracts etc. How many new REITS a year can they be and how much fees can you make ?

The point is the growth story is not compelling as business is not scaleable. Perhaps other businesses may be so but fund management business relies 100% on human capital. Again ARA came about during the property boom. And the key management has cashed out big time. In fact the risk is that to make the stocks attractive again, management may be induced to take more risks. For example, take propreitory positions if it has collected too much cash from the IPO.

For this counter, not only the key manager has cashed out big time. Cheung Kong as well. The latter is related to Li and the main REIT that ARA manages is Suntec REIT - which is controlled by Li. Looks like Li has recovered all the REITs fees because of the IPO. Very clever ! It is common that Li structures its operating companies in its staple this way. The common trait has been Li always manages to exit at the right or best time.

I am not saying that ARA Management is no good. It could well be good. I just do not see value investing into fund management companies having worked in the industry before.

Many businesses out there in manufacturing and services can provide long term value for investors. However, professional services like legal services, auditing services, investment banking and fund management simply do not due mainly to the (1) high agency costs and (2) unsustainable competitive advantages - values are derived overwhelmingly from human capital and human capital as a factor of production, unfortunately are highly mobile.

For example, Normura paid over US$2 billion to take over Lehman staff. But people are questioning how long Lehman staff will stay. If economies turnaround, these guys can set up their own shops or are being pouched by other houses.
Certain professional services do derive strong franchise overtime, but still cannot escape the problem of high agency costs.