July 28, 2011

Man Group PLC

Primary Credit Analyst: Dhruv Roy, London (44) 20-7176-6709; dhruv_roy@standardandpoors.com Secondary Contact: Richard Barnes, London (44) 20-7176-7227; richard_barnes@standardandpoors.com

Table Of Contents
Major Rating Factors Rationale Outlook Profile: Focus On Alternative Investments Support And Ownership: FTSE-100 Listing Strategy: Focus On Realizing GLG Revenue Synergies Risk Management: Conservative Management Of Complex Risk Profile Profitability: Positioned For Longer-Term Earnings Growth Finances: Capitalization Weaker Relative To Historical Levels, Although Adequate Related Criteria And Research

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Major Rating Factors
Strengths:
The largest global publicly listed hedge fund manager, with a long track record. Acquisition of GLG Partners Inc. (GLG) has strengthened the franchise by enhancing diversity of assets under management (AUM) by product, channel, and geography. High fee margins and upside potential to earnings from performance fees. Strong distribution capabilities. Counterparty Credit Rating
BBB/Stable/A-2

Weaknesses:
Weak gross debt service metrics. Uneven short-term investment performance. Weak net fund flows over the past few quarters, albeit with signs of improvement since the GLG acquisition. More complex risk profile than traditional asset managers.

Rationale
The ratings on Man Group PLC reflect Standard & Poor's Ratings Services' view of its strong market position in the hedge fund industry and long track record. Man's high-fee margins and distribution capabilities are also supportive rating factors in our view. Offsetting these factors are Man's weak gross debt service metrics, patchy investment performance, and the complexity of its risk profile relative to traditional asset managers. We note that prior to the quarter ended March 31, 2011, Man had nine consecutive quarters of net fund outflows. However, we consider that this trend may be reversing with strong net inflows of $3.7 billion for the most recent quarter ended June 30, 2011. In our view, the GLG Partners Inc. (GLG) acquisition (and successful integration) is a net positive for Man's business profile, which we already viewed as relatively strong for the sector. In particular, GLG has broadened Man's product offering and reduced its reliance on in-house investment manager AHL. We note that continued market volatility and macro uncertainty has hindered investment performance with AHL Diversified PLC approximately 12% below peak on a weighted-average basis as at June 30, 2011. Notwithstanding near-term market volatility, however, we view the Man-GLG combination as being well positioned to capitalize on longer-term trends in the hedge fund industry and drive better net sales and improved cash flow. Man continues to have high margins with an average gross management fee margin for the year ended March 31, 2011 of 277 basis points (bps). Although performance fees are important to Man's revenue growth, we note that Man has a solid base of more stable management fee revenue, unlike many hedge fund peers. Man's debt-servicing capacity has been on a declining trend. Adjusted EBITDA (excluding nonrecurring items and performance fees) covered gross interest payable by 5.1x in the year to March 31, 2011, compared with 11x in the prior year. We expect this metric to remain around the 5-6x level in the year ended Dec. 31, 2011 (nine months, annualized. Man is moving to a December 31 financial year-end; as a result, the next reporting period will be nine

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months). Leverage, measured by gross debt to adjusted EBITDA, rose to 3x at March 31, 2010, from 0.8x a year earlier, partly as a result of a shift in Man's funding strategy to diversify funding sources. Leverage as at March 31, 2011 remained high at 3.2x. We see this relatively high level as part mitigated by Man's cash levels. We consider that liquidity will remain sound, reflecting our expectation that its liquidity needs will remain lower than they have been in the past. Although Man's capitalization, as measured by the ratio of total tangible equity (TTE) to AUM, declined from 4.9% at March 31, 2010 to 1.8% as a result of the GLG transaction, we consider it to be adequate and in line with similarly rated asset managers.

Outlook
The stable outlook reflects our expectation that Man's strengthened business profile will lead to a gradual improvement in cash flow and gross leverage metrics while continuing to maintain adequate liquidity and capital. The ratings could be lowered if gross leverage metrics remain at or around their current level. The ratings could also be lowered if we consider that revenue synergies with GLG are not being fully realized or if there is a sustained period of weak investment performance and net redemptions. The ratings could be raised if Man is able to demonstrate a strong and sustained improvement in debt service metrics above the 10x level (as measured by adjusted EBITDA/gross interest expense) and net sales across a broader range of products, geographies, and channels than we currently observe.

Profile: Focus On Alternative Investments

Man is a FTSE-100 listed provider of alternative and long-only investment products for private and institutional investors. It has a relatively long track record of hedge fund investment management--over 25 years. With key centers in London and Pfaffikon, Switzerland, Man employs about 1,600 staff. With AUM of $71.0 billion at June 30, 2011, Man ranks as the largest publicly listed hedge fund manager globally. Private investors ($35.9 billion at March 31, 2011). Man distributes guaranteed products ($15.1 billion) and open-ended products ($27.3 billion) to private investors through a 3,850 strong global network of intermediaries. The private investor base is well spread by geography and by distributor, although underweight in North America. Institutional investors ($33.2 billion). Asset gathering is typically through direct relationships (with consultants as gatekeepers), and the investor base is biased toward Europe.

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Chart 1

Man's investment content is provided by: AHL ($22.7 billion AUM at March 31, 2011). Prior to the GLG acquisition, this was Man's principal single manager. AHL is a U.K.-based, trend following, managed futures manager, founded in 1987. AHL has a substantially higher volatility/higher return profile than Man's other in-house investment managers. GLG ($32 billion AUM at March 31, 2011). GLG offers a range of alternative investment styles such as macro, emerging markets, and credit. GLG also includes equity long-only products. Man Multi-Manager ($14.4 billion AUM at March 31, 2011). This is Man's multi-manager offering that provides access to the full spectrum of hedge fund investing for both institutional and private investors. It also manages Man's private investor structured products.

Support And Ownership: FTSE-100 Listing

Man is a widely held, public company. We consider Man to be of low systemic importance and no external support is factored into the ratings on Man. Man is a holding company, and is the primary debt-issuing entity in the group. Business operations are undertaken through various operating subsidiaries. These subsidiaries are regulated, where necessary, by 17 regulatory bodies globally. Man is not a regulated entity in its own right, but it is subject to consolidated supervision by the Financial Services Authority (FSA) and is subject to prudential and capital regulation. As a result, the consolidated group is subject to the FSA's prudential requirements, the most important of which are around the minimum level of capital and

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corporate governance standards.

Strategy: Focus On Realizing GLG Revenue Synergies

We view the GLG transaction as a transformational acquisition for Man. It catapulted Man to the top of the hedge fund league tables in terms of AUM and significantly expanded its product set. Strategically the acquisition has reduced Man's reliance on AHL and diversified its AUM: By product. GLG's discretionary investment style, with a particular focus on equities, is complementary to Man's quantitative investment style. Additionally, (a) GLG brings an expandable platform, which will facilitate new product development, such as the recent launch of the Man IP 220 GLG, the first guaranteed product combining AHL and GLG styles. (b) GLG's focus on liquid alternatives fits well with increasing investor demand for these types of products. By channel. GLG's investor base has a bias to ultra high-net-worth and sovereign wealth funds, areas where Man is under-represented. By geography. GLG's European sales are skewed to the U.K. and Southern Europe in contrast to Man's greater strengths in Switzerland and Germany. Man's distribution is strong in Asia-Pacific, which represents a new opportunity for GLG products. We expect Man to continue to invest in Asia-Pacific by adding scale and bringing investment management talent closer to the local markets. In addition to focusing on revenue synergies from the GLG acquisition, Man will likely look to address its current under-representation in the North American markets by building strong consultant relationships. Man's acquisition strategy is focused on wholly owned investment managers as evidenced by the sale of its 25% stake in BlueCrest in March 2011 and the purchase of the remaining 50% stake in Ore Hill (to drive expansion in U.S. credit markets). While we do not expect any large acquisitions in the medium term, Man will continue to look for small bolt-on acquisitions that expand its existing product offering. Prior to the quarter ended March 31, 2011, Man had reported nine consecutive quarters of net redemptions (see chart 2). However, sales momentum has gradually been building since the GLG acquisition with record gross sales of $9 billion (driven by open-ended alternative sales) and strong net sales of $3.7 million in the quarter ended June 30, 2011. While we recognize the potential headwinds to near-term flows, particularly if market conditions continue to hinder investment performance , we believe that Man's strong distribution capabilities combined with an expanded product set to suit a wide range of investment styles positions the organization for long-term organic revenue growth.

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Chart 2

Risk Management: Conservative Management Of Complex Risk Profile

Man's business model results in significant associated liquidity, credit, and market risk. This complex risk profile needs to be, and is, carefully managed. Overall, Standard & Poor's considers Man's enterprise risk management to be adequate. In recent years, Man has proportionately reduced these risks while also enhancing its risk management practices--a policy that is likely to continue. Nevertheless, Standard & Poor's expects these risks to remain material for the foreseeable future. We don't believe that the acquisition of GLG has materially affected the key elements of Man's liquidity, credit, or market risk.

Risk governance
Man employs a "hub and spokes" approach to risk management. That is, the strong central group risk management function supports the risk management functions in each in-house investment manager. The former's focus is on monitoring and managing groupwide, corporate risks and the latter's is on investment risk, for example, the risks relating to the underlying investment portfolios. While the asset managers effectively operate in silos, coherence in risk management is ensured through subjecting all to the same risk methodology and governance requirements.

Liquidity risk
Man maintains a substantial stock of liquidity because it may choose in certain circumstances to provide financial support to its fund products. Cash and cash equivalents were down from $3,229 billion at March 31, 2010 to $2,359 million at March 31, 2011, as a result of the GLG acquisition. In addition, Man has a $1.56 billion

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committed syndicated facility, undrawn as at end-July 2011. Although cash levels have fallen as a result of the GLG transaction (and other actions such as the recent purchase of Lehman exposures from GLG's Long Short and North American Opportunity funds for $355 million) we consider that Man's liquidity requirements appear lower than previously. Over the past two years Man's financial guarantees and commitments have fallen considerably. Man also models a variety of liquidity stress scenarios, the results of which are being used to determine the quantum of liquid resources required. Man considers that its more dynamic management of AHL's investment exposure with constraints on the amount of cash that can be used for margin trading, along with Man Multi-Managers' greater focus on more liquid managers and styles (with tight constraints on contractual dealing days), reduces its stress liquidity requirement. We expect Man's strategic approach toward liquidity to remain conservative. Table 1 highlights the reduction in Man's total financial guarantees and commitments over the past two years to $1.4 billion from $2.4 billion. The most notable decline has been in respect of some of its legacy structured products for which Man has made a commitment to provide monthly liquidity to investors. The potential impact of these committed purchase agreements (CPAs) will gradually reduce to zero, over time. In practice, Man has not needed to provide short-term bridging finance for these CPAs.
Table 1

Financial Guarantees And Commitments

(Mil. US$) Committed purchase agreement MF Global brokerage account Intra-day credit facility Operating lease commitments Loan facilities provided to fund products FX trading guarantee Empyrean Re commitments Other TOTAL Cash balances 1,422 2,359 1,526 3,229 2,418 2,361 400 432 FY11 590 FY10 556 50 400 520 FY09 954 50 400 575 177 24 238 548 25 3,965 1,876 124 214 FY08 2,654 400

Permanent leverage is provided to the fund products directly by a pool of banks, on a nonrecourse basis to the investors and with no guarantee from Man. At March 31, 2011, these borrowings totaled $2.9 billion, with an additional $1 billion available, most of which is used by Man's capital-guaranteed products. Man mitigates the associated refinancing risk through policies on diversification by source and maturity, and by maintaining spare pool capacity.

Credit risk
Man's credit risk exposure arises primarily from its practice of making uncommitted short-term loans to its funds. Loans to funds totaled $551 million at March 31, 2011, up from $373 million in the prior year. This amount, however, can vary considerably during the course of the year. New lending decisions, which follow a full credit assessment of the funds, are subject to a hierarchy of delegated approval levels and internal credit limits, at individual fund levels and in aggregate. Fund performance is monitored daily and a review triggered if the net asset value falls to a predefined multiple of investors' capital. The fund is then put into a degearing process, which reduces

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investment exposure and may ultimately lead to the fund winding down. On the rare occasions where Man aids this process by lending into the fund, its risk is clearly higher than for a performing fund. However, Man's track record is strong in this respect and has never experienced a default.

Market risk
Like any asset manager, Man is exposed to market risk because fee income is dependent on fund performance and AUM. However, the diversity of the underlying hedge fund strategies offer some mitigation. Market risk also arises through Man's proprietary seed investments in its funds ($367 million at March 31, 2011). We are not anticipating significant growth in this portfolio, which remains diversified. Seed investments take two forms--funds placed with early stage hedge fund managers as part of the multi-manager due diligence process, and early stage capital in new products used to establish a track record. Man manages the attendant risk through investment limits (to individual funds and in aggregate), risk limits (principally value-at-risk (VAR) related), and stress testing.

Operational risk
Man pays particularly careful attention to the operational risks associated with product suitability, sales practices at intermediaries, fund administration, and valuations. While intermediaries are always responsible for the client relationship and therefore ensuring suitability, Man vets prospective intermediaries and works closely with them on product documentation and disclosures. Key man risk is not a material factor in most of the in-house investment managers or at group level--they are quite large organizations, with strong management teams and good infrastructure. That said, while Man has been able to retain GLG portfolio managers (PMs) to date, departure of key PMs could adversely affect investment performance and sales. Man is a technology-intensive business at all levels, meaning that technology investment is significant and constant. All key operational hubs are backed up to remote data centers and disaster recovery sites. Business continuity plans are tested regularly.

Profitability: Positioned For Longer-Term Earnings Growth

Man remained solidly profitable on an underlying profit before tax basis in the year to March 31, 2011 with statutory profit before tax from continuing operations being dragged down by $275 million of one-off adjustments such as impairments of Man Multi-Manager and Ore Hill and GLG acquisition costs. Man's earnings profile is supported by high fee margins, which remain robust, and the variable nature of a sizable part of its cost base. Our earnings expectations for Man remain fairly modest in the near term, reflecting volatility in sales and investment performance due to uncertain market conditions. In our view, the acquisition of GLG has helped to mitigate downside risk by diversifying the sources of fee income and laying the foundation for longer-term earnings growth. Revenues are primarily derived from management fees and performance fees. Man generates significantly higher management fee margins than traditional asset managers, with margins on the guaranteed and AHL products being much higher than GLG alternatives and long-only products (see table 2). While we do not anticipate any material pressure on fee margins, management fee revenue will be adversely affected if GLG investment flows and performance continue to outpace those of AHL and guaranteed products.

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Table 2

Gross Fee Margins (At March 31, 2011)

(Margin basis points) Average AUM/total Guaranteed AHL open ended GLG alternatives Institutional Long only* 277 470 360 156 115 75

*FY 2010 GLG alternatives and long only margins based on the period from Oct. 1, 2009-March 31, 2010. Source: Man Group.

Although we expect Man to demonstrate some earnings volatility due to the contribution of performance fees, we note that unlike many hedge fund peers, Man has a solid base of management fee revenue. In the past, performance fees have been substantial. Chart 3 highlights Man's strong historical performance prior to FY10. Reported performance fees for the year ended March 31, 2011 of $203 million was split approximately 50:50 between Man and GLG. We believe GLG performance fees will provide good upside potential going forward as 65% of GLG performance fee eligible funds were above high watermark at March 31, 2011.
Chart 3

Reflective of its business model, Man operates a technology heavy, operationally intensive business model, which results in operating expenses being proportionally higher than at traditional asset managers. In the past Man has

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reacted to changed market conditions by demonstrating variability of costs and initiating cost reduction programs. Man is currently on track to deliver the full $50 million of identified cost synergies from the GLG acquisition by September 2011. Other cost initiatives include outsourcing of shareholder services to an independent administrator, which adds further cost flexibility. We consider that gross interest coverage is weak and will likely be weak for ratings in the current fiscal year (nine months to year-end Dec. 31, 2011). However, in the longer term we expect a gradual improvement in coverage metrics driven by favorable sales impact and improved investment performance (see chart 4).
Chart 4

We exclude one-off gains and losses from EBITDA (see table 3). We also take a conservative approach to interest expense using gross rather than net figures. Our calculation of interest expense includes one-half of the servicing cost of Man's hybrid issue in 2008, in accordance with our criteria (Man treats this as a cost on equity). On this basis, Man's EBITDA was $732 million in the year to March 31, 2011, and EBITDA covered interest expense 7.4x. We place greater analytical emphasis on an adjusted EBITDA measure, which removes the contribution from potentially volatile performance fees. Man's adjusted EBITDA covered interest expense 5.1x in the same period and we expect this metric to remain flat in the current fiscal year (nine months, annualized).
Table 3

Calculation Of Adjusted EBITDA

(Mil. US$) Reported pretax profit* FY11 308 FY10 525 FY09 727 FY08 3,832

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Table 3

Calculation Of Adjusted EBITDA (cont.)

plus: depreciation & amortization plus interest expense* less/plus one-off gains/losses Accelerated amortization of MGS sales commissions Restructuring costs Gain on disposal of 50% of subsidiary Impairment of Ore Hill investments and goodwill Gain arising from residual interest in brokerage assets Impairment of Man Multi-Manager and Ore Hill Gain on disposal of BlueCrest Other FY 2011 One-Off Adjustments Discontinued brokerage operations EBITDA less performance fees/gains on seed capital Adjusted EBITDA 732 228 504 397 (257) 135 0 639 91 547 0 1,318 367 951 (1,753) 2,139 1,141 998 51 99 275 45 50 19 0 53 0 0 (34) 39 53 500 107 37 (48) 299 105 27 33 (1,753) 0 0 0 0 0

*In FY11, FY10 & FY09, differs from reported pretax income due to the hybrid dividend, which is treated by Man as a cost on equity. We add half of this amount to interest expense.

Finances: Capitalization Weaker Relative To Historical Levels, Although Adequate

Man has a relatively straightforward and high-quality capital structure, characterized by about $1.3 billion of total tangible equity (TTE) representing 1.8% of AUM (see table 4). While this metric is down following the GLG acquisition from a very strong 4.9% as at March 31, 2010, we consider Man's capitalization to be adequate and in line with similarly rated asset managers.
Table 4

Reconciliation Of Reported Equity To Tangible Total Equity

(Mil. $) Reported common equity less: intangible assets less: goodwill less: proposed dividend less: 50% of $300 million hybrid securities less: material holdings in financial institutions Bluecrest & other associates Tangible total equity 68 1,277 333 1,959 351 1,926 31-Mar-11 4,436 873 1,839 229 150 30-Sep-10 3,673 267 804 160 150 31-Mar-10 3,987 337 798 425 150

While our rating focus is on cash flow as the primary source of an asset manager's ability to service its obligations, we also focus on TTE regarding a company's ability to absorb unexpected losses. In our view, this is especially relevant in the case of Man, given its risk profile. As at May 31, 2011, Man reported "excess" capital over minimum regulatory requirements of approximately $900 million (down to $850 million following the purchase of frozen Lehman assets). Although this represents a decline

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from historical levels, which has been comfortably over $1 billion in recent years, we consider that Man does not anticipate any strategic use of capital in the near-to-medium term. However, over time, if Man continues to accumulate excess capital, we can envisage a scenario where some of it may be returned to shareholders, while continuing to remain adequately capitalized. Man's gross debt leverage has risen from a low point in early 2008 and remains relatively high even though no new debt has been issued as a result of the GLG transaction. Strategically, Man has sought diversification by source and tier, extending the maturity profile, bolstering liquid assets, and improving the cost efficiency of its capital structure. We expect Man's leverage to remain around the same level during the current fiscal year (nine months) with a gradual decline from 2012 onward.
Chart 5

Our leverage metrics are based on total debt of $1,628 million at March 31, 2011. This comprises reported debt of $1,478 million plus $150 million in relation to Man's $300 million hybrid debt issue. The latter, issued in 2008, is an 11% perpetual subordinated capital security that qualifies as Tier 1 regulatory capital and is convertible into preferred stock. When calculating TTE, our preferred capital measure for asset managers, we classify it as of "intermediate" strength equity content, and include 50% of the principal in TTE. We also note that periodically Man makes use of its syndicated loan facility. Man's 600 million five-year bond issue in February 2010 reflected Man's desire to lengthen and pre-fund its maturity profile in anticipation of likely reduced availability and less favorable terms when refinancing its loan facility.

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Measured by total debt to adjusted EBITDA, gross leverage was relatively high at 3.2x at year-end 2011, up slightly from 3.0x a year earlier.
Table 5

Man Group PLC Financial Statistics

($ 000s) Assets under management Total revenues (net) Total management and other fees (%) Total performance fees (%) Reported net income* Underlying net income EBITDA EBITDA/interest expense (x) Adjusted EBITDA Adjusted EBITDA/interest expense (x) Total assets Total debt Total equity Tangible equity Pretax income/Avg. Assets under Mgmt (%) Operating expenses/Avg. Assets under Mgmt (%) Total equity/assets under management (%) Total debt/assets under management (%) Total debt/tangible assets (%) Total debt/EBITDA Total debt/Adjusted EBITDA 2011 2010 2009 2008 2007 2006 69,100,000 39,400,000 46,800,000 74,600,000 61,700,000 49,900,000 1,467,000 92.8 7.2 194,500 469,500 732,000 7.4 504,000 5.1 6,818,000 1,628,000 4,057,000 1,277,000 2.1% 3.3% 5.9% 2.4% 40.3% 2.2 3.2 1,158,000 91.5 8.5 428,500 447,500 638,000 12.9 547,000 11.1 6,032,000 1,639,000 3,412,000 1,926,000 1.3% 1.4% 8.7% 4.2% 36.1% 2.6 3.0 2,019,000 90.0 10.0 486,500 986,500 1,318,000 25.1 951,000 18.1 5,570,000 793,000 3,623,000 1,922,000 2.0% 1.3% 7.7% 1.7% 20.5% 0.6 0.8 3,011,000 92.3 7.7 3,470,000 1,717,000 2,139,000 64.8 998,000 30.2 6,236,000 402,000 4,260,000 2,346,000 3.1% 1.4% 5.7% 0.5% 9.3% 0.2 0.4 1,988,000 89.5 10.5 1,284,000 1,110,000 1,342,000 70.6 886,000 46.6 55,065,000 1,589,000 4,328,000 2,918,000 2.6% 1.2% 7.0% 2.6% 3.0% 1.2 1.8 1,738,000 90.8 9.2 1,014,000 960,000 1,209,000 43.2 646,500 23.1 31,539,000 1,524,000 3,577,000 2,021,000 2.4% 1.2% 7.2% 3.1% 5.1% 1.3 2.4

*Differs from reported net income due to the hybrid dividend, which is treated by Man as a cost on equity. One-off gains deducted. Performance fees also deducted. 2006 figures restated. Data prior to 2006 not comparable.

Related Criteria And Research

Rating Asset Management Companies, March 18, 2004 Capital Matters At Asset Managers, April 22, 2008 Ratings Detail (As Of July 28, 2011)*
Man Group PLC Counterparty Credit Rating Senior Unsecured (1 Issue) Senior Unsecured (2 Issues) Counterparty Credit Ratings History 19-Oct-2010 18-May-2010 24-Nov-2008 07-Nov-2008 BBB/Stable/A-2 BBB+/Watch Neg/A-2 BBB+/Negative/A-2 A-/Watch Neg/A-2 BBB/Stable/A-2 A-2 BBB

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Ratings Detail (As Of July 28, 2011)*(cont.)

10-Sep-2008 Sovereign Rating United Kingdom (Unsolicited Ratings) AAA/Stable/A-1+
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

A-/Stable/A-2

Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com

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