Andrei Shleifer, Billionaire?

David Warsh has a great piece on Andrei Shleifer this week. Shleifer is known as a first-rate economist, and is also notorious for some shenanigans in Russia in the 1990s; Warsh makes a strong case that it's time "to close the book on Andrei's Shleifer's role at the center of Harvard's Russia scandal".

Shleifer also reveals the sheer size of the funds which were founded by Shleifer and his wife, Nancy Zimmerman. Zimmerman's hedge fund, he says, now has $3 billion in assets under management, while LSV Asset Management, which was co-founded by Shleifer, has an astonishing $66 billion in AUM.

Which makes Warsh's tentative stab at Shleifer's net worth extremely modest: "together the pair, through their start-ups, may have amassed net worth of $40 million or more," he writes. Going on those AUMs alone, my guess is that the Shleifer-Zimmerman family has a net worth of vastly more than $40 million, and quite possibly something in the billion dollar range.

In fact, the $3 billion number for Bracebridge Capital, Zimmerman's fund, is two years old; if she's merely performed in line with other $3 billion funds circa 2006, my guess is she might well be at double that level right now.

Zimmerman founded Bracebridge in 1994 with $55 million; she's been in there since day one, collecting what we can reasonably assume to be 2-and-20. We can also assume, from the 50-fold increase in AUM, that her investment returns have been very good. And since she's the founder, we can assume too that the vast majority of her wealth has been (re)invested in Bracebridge.

The reason that hedge fund managers can get so magnificently wealthy is that they take their enormous fees, reinvest them in their own funds, earn high returns, and get paid even greater fees the next year. By the time a fund reaches $3 billion, it's not uncommon for the founding partner to be a billionaire. But in any case, if Bracebridge is at $3 billion and is making 2-and-20 on, say, 12% returns, then that works out at $132 million per year in performance fees. Even if less than half of that goes to Zimmerman personally, it's likely to have compounded to something in the billion-dollar range by now: after all, she's been in the business for 14 years, which is a long time to be compounding alpha.

As for Shleifer himself, Warsh reports that he sold his share in LSV "for a large but undisclosed sum several years ago". How large is that sum likely to have been? Well, LSV probably didn't have $66 billion under management back then, but on the other hand it was probably growing quite fast. Let's say that Shleifer had a 30% stake in the company, that when he sold out there was $30 billion of funds under management, and that he sold at a valuation of 4% of AUM. That would mean he received $400 million for his stake. (It's also fair to assume that the proceeds were invested well, and have grown substantially since then.)

The real numbers might be lower than that - or they might be higher, we don't know. But between Zimmerman and Shleifer, it's probably reasonable to assume that they could quite easily lose $40 million down the back of the sofa and not notice. These guys are rich.

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