E&Y Revision Prompts Hedge Fund to Restate

Accountancy changes its guidance and GLG, one of last year's crop of funds going public, says it improperly reported limited-partner profit share.
Stephen TaubApril 16, 2008

One of the handful of hedge funds that went public last year is restating its financials to correct accounting errors. And the decisioni to restate comes after its accounting firm, Ernst & Young, LLP, revised its guidance in the area.

GLG Partners said it will restate its financial statements for 2006 and 2007 because it improperly accounted for limited-partner profit share as an operating expense.

The decision to revise the financials was made after E&Y’s revision in guidance related to the accounting treatment of the limited-partner profit share that is allocated to participants in the company’s limited-partner profit share arrangement.

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GLG, which went public last year in a reverse acquisition by a shell company, Freedom Acquisition Holdings Inc., was founded in 1995 by Noam Gottesman, Pierre LaGrange, and Jonathan Green as a unit of Lehman Brothers Holdings Inc. Green left the firm a number of years ago. At year-end, it managed over $24 billion.

A big portion of the firm’s earnings are paid out to key personnel.

The company elaborated that the restatement reflects a change in interpretation about how its limited-partner profit share is presented under GAAP. Non-GAAP adjusted net income and operating cash flow are unaffected.

In mid-2006, GLG entered into partnerships with a number of its key personnel. These individuals ceased being employees and became holders of direct or indirect limited partnership interests in GLG entities and provide services to GLG directly or through two limited liability partnerships.

They are entitled to priority drawings paid as a partnership draw: a fixed base limited partner profit share and a variable limited partner profit share which is contractually linked to management fees and performance fees attributable to the individuals concerned. Discretionary limited-partner profit share distributions are determined by management in its sole discretion after year end.

Under the company’s prior accounting treatment, distributions to limited partners were accounted for as equity distributions and recognized within the statement of members’ equity for periods prior to November 2, 2007, the date the acquisition became official.

As a result of the acquisition and the related reorganization creating a consolidated group, the limited-partner interests are no longer considered as equity interests and, therefore, a more appropriate treatment is to include distributions to the limited partners as an operating expense rather than minority interest, the company said in its regulatory filing.

For periods both before and after the acquisition, the company said it had recognized distributions on an as declared basis. GLG has restated its combined and consolidated financial statements for the two years to reflect these amounts as limited partner profit share within operating expenses, matching the period in which the related revenues are accrued and services provided, GLG explained in its regulatory filing.

Under the company’s prior accounting treatment, the substantial majority of these amounts would have been recognized in the first quarter of the following fiscal year when these amounts were actually declared.

The restatement will result in a reduction in net income before minority interests of $401 million — from net income before minority interests of $59.3 million, to a net loss before minority interests of $341.7 million for the year ended December 31, 2007.

It will also result in a reduction in net income before minority interests of $201.5 million — from $359.5 million to $158.1 million for the year ended December 31, 2006.

GLG said that the restatement has no cash impact on the company and does not impact the non-GAAP “adjusted net income” measure used by management.