Hedge fund Sprott to gamble on IPO

Date: Tuesday, April 8, 2008
Author: Andrew Willis & Boyd Erman, Globe and Mail

Contrarian investor Eric Sprott is swimming against the tide again, planning an initial public offering of Sprott Asset Management Inc. in the midst of the worst IPO market in a decade.

The imminent deal could value the company at up to $1.5-billion, and Mr. Sprott's stake at $1-billion.

The planned offering will see $200-million of Sprott Asset stock offered to investors in a sales campaign that could start as soon as Thursday, according to investment banking sources. It's the latest in a series of IPOs meant to pass the torch from one generation of money managers to the next.

The offering will confirm the 63-year-old founder's status as a self-made billionaire, as Mr. Sprott, an Ottawa native and noted art collector, owns 78 per cent of the company. That share will be reduced to 67 per cent in the IPO.

A decade-long run of winning bets on resource companies, along with contrarian calls against blue-chip stocks such as the banks, means Sprott Asset can go public on the back of a benchmark equity fund that posted a 28-per-cent average annual return over 10 years. The S&P/TSX index averaged a 7.8-per-cent performance over the same period.

"Eric wants to build something for the long term, and the IPO helps pass this business on to the portfolio managers who have recently joined the firm," said one banker working with Sprott Asset, which takes care of $6-billion for institutional and individual clients.

The planned financing comes amid recession fears, a selloff in financial services stocks and a vicious bear market for IPOs. Financiers say all this negative news will add lustre to Sprott Asset's strong results.

"There's a scarcity value to Sprott Asset, as a money manager, and a scarcity value to an IPO in this market," said another banker working on this financing, noting credit card firm Visa just completed a successful initial offering.

He added: "It's also a play on the strong commodity cycle," because Sprott is so closely identified with resource stocks.

Mr. Sprott, a married father of two, formally launched Sprott Asset in 2000 after successfully founding an investment bank now known as Cormark Securities Inc., then starting a hedge fund.

Over the past year, Sprott Asset Management hired a string of proven money managers as part of a diversification strategy. Small-cap specialist Allan Jacobs joined from Sceptre Investment Counsel Ltd. and award-winning resource stock pickers Charles Oliver and Jamie Horvat moved in from AGF Funds.

An IPO makes it easer to eventually transfer ownership to this group from Mr. Sprott and other veterans such as growth-focused Peter Hodson, who joined from CI Funds, and gold bug John Embry, aged 67. The concept of an IPO has been openly discussed by company executives for months. Mr. Sprott was not available for comment yesterday.

Sprott Asset insiders who sell their stock in the IPO are expected to reinvest much of the money in their funds.

Toronto-based Sprott Asset has six funds available to individual investors, including dedicated energy and gold funds, along with its high-flying equity fund.

In Canada, the planned Sprott Asset IPO follows on the 2006 debut from fund manger Gluskin Sheff + Associates Inc. and financings this summer from U.S. hedge fund manager Och-Ziff Capital Management and larger money managers such as Blackstone Group LP and Fortress Investment Group LLC.

While Gluskin Sheff, with a $700-million market capitalization, has performed well for investors, the three big U.S. money managers that went public last summer are now trading well below the IPO price.

"The challenge for Eric Sprott will be convincing investors they should pay a premium for a share of his performance fees.

"Although they've paid that premium in the past, I think the decline in the U.S. funds may make them reluctant to pay a big multiple in the future," said an executive at a rival, private Canadian money manager.