Amid a lackluster merger market, one sector is shining: marriages between hedge funds. Bankers expect these deals will continue to be a sunny spot over the next year.
Announced global mergers have totaled $2.46 trillion so far this year, a 6.7 percent increase from the $2.3 trillion for all of 2009, according to Dealogic, which tracks corporate finance activity. But slice out mergers and acquisitions among hedge funds and asset managers and a far prettier picture emerges. So far this year, M.&A. volume in the hedge fund and asset management space is up to $7.75 billion, a 44.4 percent gain from $5.37 billion for all of 2009, according to Dealogic.
This year’s deals include the MAN Group’s move to buy GLG Partners of London for $1.6 billion, Credit Suisse’s move to buy a minority stake in York Capital for $425 million and TPG-Axon Capital Management’s merger with Montrica Investment Management. Both TPG and Montrica were run by former star traders at Goldman Sachs.
To be sure, hedge fund and asset management acquisition activity represents an infinitesimally small part of overall merger volume. However, it is drawing the interest of bankers because it is the one area that is growing and expected to expand.
At a recent presentation in London for senior officers of hedge funds, Joe Hershberger, the global head of asset management investment banking at Credit Suisse, and Andrew Laurino, head of the hedge fund advisory business, said they expected more strategic activity in the hedge fund industry.
This could include full-blown mergers; so-called convergence type trades where managers who take long positions, or bullish bets on the market, are looking to buy alternative asset managers like hedge funds; and the purchase of minority stakes in hedge funds.
Among the buyers of such stakes could be securities firm or banking boutiques that are seeking to build up their asset management expertise and private equity-type vehicles that have been created to take interests in hedge funds. Goldman Sachs, for instance, has Petershill, and Neuberger Berman, the money manager that was part of Lehman Brothers, put together an in-house team this year of former Lehman executives to invest as much as $1 billion in firms that run hedge funds. The investments will be made through a new private equity fund called Dyal Capital Partners, which is in the midst of raising money.
A number of trends are driving consolidation on the hedge fund landscape. Hedge funds that once represented the entrepreneurial verve of the financial services industry are increasingly morphing by necessity into big institutions with their own well-developed legal and compliance departments among other features. In addition, since the financial meltdown of 2008, more and more assets have been flowing to the biggest hedge funds, making it harder for the minnows of the business to survive.
Of course, not everyone will be gripped by the consolidation craze. For example, Eric Mindich, a former Goldman Sachs arbitrager who manages Eton Park Capital Management, is more likely to be focused on running his own fund even though his firm has the heft and infrastructure to be an acquirer, according to people close to Eton Park.
The Fortress Investment Group, by contrast, is likely to be a buyer of assets as part of a bid to build businesses across the investment spectrum. This year, Fortress acquired Logan Circle Partners, a long-only fixed-income manager based in Philadelphia with about $12 billion in assets. During its quarterly earnings conference calls, Fortress has been open about seeking to expand its global platform of products selectively.
A slew of hedge fund deals, while exciting for the industry, is not likely to produce big paydays for bankers. Many of these deals are negotiated by the principals, and bankers are often brought in at the 11th hour to bless the transactions.
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