Remember the fallen financial rock star Hamish Douglass? He has a final act

When rockstar investor Hamish Douglass dropped his proverbial guitar and famously left the stage at funds management group Magellan a few years ago, the backing band couldn’t hold the audience and the money manager’s funds under management experienced a precipitous decline.

But Douglass made one big perspicacious investment during his time on top: to have Magellan seed a start-up standalone investment bank, Barrenjoey, in which it took a 36 per cent stake.

And in only five years, Magellan’s investment has turned into a four bagger. For Magellan, the $1.6 billion merger with Barrenjoey, announced on Monday, represents a new act.

Douglass has long disappeared from the public eye, but this one investment might be enough to at least partially redeem the legacy of the one-time investment messiah who at his peak preached to thousands of retail disciples in concert-sized venues.

Magellan suckled the baby Barrenjoey with $150 million in seed capital but this corporate infant has now outgrown its parent. So Magellan’s merger announcement represents a family reunion.

But the tables have turned. Barrenjoey no longer needs Magellan – rather Magellan needs the successful Barrenjoey.

Magellan needed some celebrity attention (and growth earnings) to lift its performance and shed its somewhat moribund image. Four years ago, Magellan boasted around $120 million in funds under management – an amount which has fallen to $40 million.

And Barrenjoey comes with its own investment bank celebrities – Matthew Grounds and Guy Fowler, who are not household names but in business and financial circles, they are as close as you get to rain making deal doers and networkers.

Five years ago, this duo sensationally left investment bank UBS and to pitch this new investment bank in an already crowded market dominated by the local subsidiaries of large US and European investment banks and our homegrown success story, Macquarie.

The way this merger is engineered, the Barrenjoey staff will together own about 31.7 per cent of the enlarged Magellan. Most of the remainder will be in the hands of the current Magellan shareholders and Barclays will retain a small stake.

The largest individual shareholders will be Grounds and Fowler who will be handcuffed to the organisation through their shareholdings that are subject to an unusually long nine-year escrow.

The extent to which the pair will remain hands on in running their patch for the remaining near-decade remains to be seen. But the shareholding will provide plenty of incentive.

At least they will have an exit avenue for their respective stakes in the mid-2030s.

Increasingly investors in Magellan have been more interested in its stake in the fast-growing Barrenjoey than in the Magellan’s funds core management business. Over the past five years Magellan’s share price has fallen more than 77 per cent.

While the Magellan funds management business has struggled, Barrenjoey’s profit almost doubled in the six months to December compared with the previous corresponding period.

While there are no real synergies to be found in merging the two companies, the inclusion of Barrenjoey’s high earnings growth profile and Magellan’s larger balance sheet will dovetail nicely.

The combined group will also have a more diversified earnings base, particularly given investment bank earnings can, in general, be more volatile.

How investors view this deal won’t become obvious until Tuesday when Magellan shares resume trading. It may, however, provide a real test of the merger and acquisition credentials of Grounds and Fowler.

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