The asset manager will issue up to 4,060,074 new ordinary shares to compensate Mahony and Powell.
This conversion or ‘crystallisation’ will affect the $1.79bn (£1.35bn) Polar Capital Healthcare Opportunties fund and £255m Polar Capital Global Healthcare trust run by Mahony and Powell. The duo will continue taking profits on the Polar Capital Healthcare Blue Chip fund.
From the date of crystallisation, Mahony and Powell will no longer be entitled to their share in the healthcare group’s operating profits. They will also receive a “reduced interest” in their performance fees.
Separate profit centres
Polar has a unique business model compared with other peers in the sector. Its 12 fund management teams are structured as their own separate profit centres. Each year managers receive a cut from their franchise’s core operating profit in addition to performance fees generated from their funds.
Managers are also able to purchase preference shares in parent company subsidiary Polar Capital Partners Limited. A separate preference share class is issued each time a new team of fund managers joins the firm and in certain cases when a new fund is launched.
Polar stated in its last annual report that the preference shares provide each manager with “an economic interest” in the funds they run.
Diversify revenue streams
Ryan Hughes head of fund selection at AJ Bell views the move as positive for Mahony and Powell.
By becoming owners in the broader business they will no longer be solely reliant on the revenue stream from their franchise and can participate in Polar’s share price upside as it grows, he says.
Polar Capital has been expanding rapidly under the direction of CEO Gavin Rochussen who joined the firm in July 2017. Since Rochussen took the helm, Polar’s share price has risen more than 40% to roughly 600p per share.
Numis said “fund flows and operating momentum appear to remain very strong” in its H1 appraisal of the fund group. It anticipates Polar’s earnings per share will climb from 36.6p in 2018 to 41.7p by 2019 though this is lower than its initial EPS target of 42.2p.
Not many takers
And yet not many managers have decided to forfeit their profits for equity in the wider group.
In the company’s 11-year history only two other Polar managers have opted to convert their preference shares.
All managers have the ability to convert their preference shares into cash or ordinary shares in Polar.
Immediately earnings enhancing
The Aim-listed manager has also said crystallising the healthcare business will be “immediately earnings enhancing for shareholders”. Based on its last set of annual results for the year ended 31 March 2018, Polar said this move would enhance earnings by an extra 3p per share.
Mahony and Powell will receive 10% of the new ordinary shares immediately. The remaining shares will be distributed 30% at a time a year from the end of March.
The crystallisation value will be recalculated on the first, second, and third anniversaries based on the profits of the business unit in the 12 months ended on the respective anniversary.