Back in August, Regal Partners told the market that Phil King — co-founder of the firm and its chief investment officer for long-short equities — would begin a staged transition to retirement, and the ASX-listed shares fell sharply on the news, as Bloomberg reported at the time. King is 57, which is a perfectly reasonable age to stop doing a job that involves taking enormous risks with other people’s money every single day. The market’s reaction was not really about whether King deserved a rest. It was about what Regal is without him.
To see what Regal is without him, the best place to look is not the fund’s marketing materials but the dealing rooms of the investment banks that service it. The AFR’s Street Talk column went around asking bankers on the equity capital markets and blocks desks what they made of the looming exit, and the responses read less like analysis than bereavement. “It’s a midlife crisis for all of us.” King was “the No.1 fee-paying client on every institutional broker’s books.” He was the first call on ECM deals. No one can take risk like him. And, the kicker: you can’t learn what he does.
It is worth pausing on the economics of mourning here. When a banker says a departing fund manager was the biggest fee-payer on the books, she is not being sentimental; she is doing arithmetic. A long-short equities fund lives by trading — constantly, in size, long and short — and every one of those trades pays a commission. A fund that turns its portfolio over aggressively is, from a broker’s point of view, not a client but an annuity. Then there are the deals: the IPOs, the placements, the block trades that banks need to move in a hurry, where having one buyer in Sydney who will genuinely commit capital and wear the risk is worth a great deal. Being the first call on those deals is how a fund gets good prices and good allocations. Being the bank with that number one client is how a desk makes its year. Both sides of that relationship are about to be renegotiated, and one side already knows it’s getting worse.
Meanwhile the fund itself is behaving the way funds behave when the person the money was handed to announces he is leaving: Street Talk reports that several Regal funds have lifted cash levels or cut leverage, bracing for possible redemptions. This is the standard key-man drill, and the mechanism is simple. Investors in a hedge fund are not, in the end, buying a firm; they are buying a person’s judgment. When that person says he’s transitioning out, some of them will ask for their money back, and a fund that has to meet redemption requests would much rather hand over cash than be forced to sell positions into a falling market at whatever price it can get. Raising cash in advance is prudent, boring and faintly ominous all at once.
The bankers’ line that you can’t learn what King does is a fitting epitaph for the whole arrangement, because it contains both the pitch and the problem. For two decades, per Hedgeweek’s account of the August announcement, King’s willingness to take risk others wouldn’t was the product Regal sold and the service Sydney’s deal desks consumed. If that appetite really is a personality trait rather than a process, then it can’t be inherited, promoted or succession-planned. It just retires at 57, takes its commissions with it, and leaves a lot of very well-paid people staring at a phone that no longer has a first number to dial.