M&A and Capital Markets Activity in Global Fund Management in 2007
Benjamin F Phillips, Managing Director
Jefferies Putnam Lovell
Alternative asset management firms remain the most popular targets in asset management transactions, accounting for a record 32% of transactions announced during 2007. Such shops comprised nearly half the disclosed and estimated value of last year’s deals, despite only involving 26% of the acquired assets under management.
As in previous years, hedge funds and funds of hedge funds were the most common alternative asset managers purchased. Weakness among Wall Street’s biggest players creates an opportunity for strategic buyers, who have remained steadfast in their interest in hedge fund firms. During the second half of the year, multi-boutique Affiliated Managers Group purchased undisclosed minority stakes in two alternative asset managers: hedge fund manager ValueAct Capital and credit specialist Blue Mountain Capital Management. Such deals used AMG’s 2004 partial purchase of AQR Capital Management as a template and significantly reoriented the multi-affiliate’s products and economics toward alternative investments. Global private client manager EFG International fully acquired Marble Bar Asset Management – quietly cashing out minority shareholder Lehman Brothers in the process – and PRS International Consulting, which offers alternative investments to its high net worth clientele. Ameriprise Financial’s Threadneedle Investments successfully won control of Convivo Capital Management in London.
Despite – and possibly due to – collapsing equity markets, trade sales of hedge fund firms should remain vibrant in 2008, particularly if public markets become a less attractive option for liquidity. Cash-flush private equity houses remain ardent shoppers, perhaps more so now that investment banks have less capital to spend. More importantly, strategic buyers, recognising that correcting equity markets further emphasise the need for absolute return and vehicles, will more proactively seek hedge fund managers that could help build such products. Spurred by a survival instinct, long-only firms will make convergence-motivated transactions more of a reality than a theory.
Prospective buyers who believe pricing will soften, however, may be sorely disappointed. Strategic buyers for hedge funds will prove far pickier than their financial counterparts. For their institutional and professional-buyer clientele, they will need solid performance statistics, some degree of industrial risk control to placate nervous plan sponsors, a product suite wide enough to support further innovation and – most important – capacity for transitioning assets from collapsing long-only mandates. Few hedge fund firms have such attributes, raising their scarcity value. A large mass of remaining hedge fund managers, bloated by over-proliferation, will find it difficult to stand out and attract assets in less forgiving markets.
Though mostly absent in deals involving single-managed hedge fund deals, convergence did drive significant transaction activity among funds of hedge funds. Sellers sought distribution from larger financial services firms, which in turn hoped to attract more corporate clients by placing FOHFs at core of their alternative investment arrays. FOHFs, which ostensibly reduce volatility by investing through multiple hedge funds, remain the more prevalent vehicles for institutional hedge fund exposure, both among risk-conscious pensions and more aggressive endowment and family offices. BlackRock will spend up to US$1.7 billion to place Quellos Group at the centrepiece of its alternatives menu, emulating a similar strategy employed by Legg Mason, which has helped direct greater dollops of institutional money to Permal Group, the FOHF firm it acquired in 2005. London hedge fund firm Key Asset Management likely will play a similar role within the product line-up of Swedish bank SEB.
The largest FOHFs, many of which are now linked to larger distributors, continue to enjoy strong organic growth. The largest and most sophisticated institutional investors are shifting to multi-strategy funds and building hedge fund portfolios themselves. But many pension plans, painfully aware of their fiduciary obligations, would rather rely on better-informed FOHFs to select managers. Family offices and endowments also continue to raise exposure to FOHFs, which they view as diversification instruments. Nevertheless, consolidation pressure will motivate many smaller FOHFs to consider a merger. As with all assembled products, FOHFs have slimmer margins than their single-managed cousins, and therefore require greater scale to thrive. With only US$400 million under management, South African FOHF specialist Blue Ink Investments saw few reasons to avoid a bid from Sanlam’s Octane Holdings alternatives unit.
Private equity houses appeared to position themselves for future transactions: TA Associates bought a significant minority in K2 Advisors, while Hellman & Friedman purchased a stake in Grosvenor Capital Management, one of the largest remaining independent FOHFs.