Focus on industry M&A: fund of hedge funds under pressure to merge
Pressure for consolidation in the $600bn fund of hedge funds industry is mounting, leaving managers who run less than about $3bn to face a struggle for survival amid shrinking assets and rising costs.
At a time when many are still recovering from clients’ redemptions after the global financial crisis, fund of hedge funds also face mounting criticisms over their fee structures and their poor performance, as well as difficulties in reaching high watermarks.
Already, the combination of pressures has brought a number of merger deals. Franklin Resources recently announced it was taking a majority stake in US-based K2 Advisors. Last June private equity group Kohlberg Kravis Roberts acquired Prisma Capital Partners, a specialist alternative investments multi-manager.
But it is not just the smaller managers that are under pressure: last May, Man Group bought out FRM, a fund of hedge funds group with $8bn in assets under management.
Morten Spenner, chief executive at £2.8bn fund of hedge funds International Asset Management, says not all mergers have been done for the right reasons. “I think many of the recent takeovers have been driven by flow pressure, not a true synergy between the two companies. Some have been more strategic, that’s true, such as the recent Franklin Templeton’s acquisition of K2 Advisors, but the majority have emerged out of necessity.”
The time may be right to acquire scale through merger, but Spenner is wary about such a strategy: “If I could buy the entire contract and directly acquire the holdings in the fund – yes. That would simply give us more assets to manage. But taking over a team of managers is too difficult and time consuming.
“You have to think about how the existing set-up fits in with your team and strategy, take into account manager egos, adapt their investment style to the philosophy of the company. We do not think this amount of effort would be worth it, so it is not something that is actively on our agenda at the moment.”
Andrew McCaffery, global head of hedge funds at Aberdeen Asset Management, told Reuters that owners needed to accept lower valuations for their businesses. He described Man’s purchase of FRM as a potential ‘game-changer’, as under the deal Man pays nothing upfront, with the price dependent on asset retention and performance fees earned.