Sadis & Goldberg Update – The alternative investment industry, and specifically the fund-of-funds space, seems to have reached an inflection point, as demonstrated by the recent surge in M&A activity. Based upon conversations with our clients, we expect that this trend will continue to grow. A few significant market catalysts seem to be driving consolidation.
On the one hand, raising capital and building distribution systems is costly and time consuming; acquiring capital, and successful marketing and sales efforts is easier, faster and cheaper under prevailing market conditions.
On the other hand, fund-of-funds’ assets under management (“AUM”) have not rebounded since the financial crisis, particularly among high-net-worth individuals. According to BarclayHedge, the fund-of-funds industry managed roughly $1.192 trillion in 2007, compared with approximately $558 billion in 2011. And the vast majority of capital inflows from institutional investors are going to the largest fund-of-funds, typically those managing $10 billion plus. In response, many mid-size fund-of-funds managers believe that their model will not survive if they do not achieve critical mass, while many smaller fund-of-funds managers feel the need to increase AUM due to increasing organizational and business cost pressures. Arden Asset Management’s, a $7.2 billion AUM fund-of-funds, recent acquisition of Robeco-Sage, a $1.3 billion AUM fund-of-funds, exemplifies this trend.
Also, it is reasonable to expect more transactions between more traditional asset management and private equity firms, and fund-of-funds in the coming months. This trend primarily is occurring because non-bank entities are taking advantage of the opportunity presented to them by banks shedding assets as mandated under Dodd-Frank. It recently was reported that K2 Advisors, a $10 billion AUM fund-of-funds, is in talks to be bought by suitors like The Carlyle Group, the global investment and private equity giant.
In the single manager space, the same dynamics apply, but increased compliance costs and complexities, and regulatory uncertainties in the post-Dodd-Frank world also appear to be factors motivating transactions. By combining in some fashion, funds realize tremendous cost efficiencies throughout the front, middle, and back offices of their organizations.
Sadis & Goldberg maintains an active Alternative Investment M&A practice. The Firm currently is advising a number of its clients on M&A transactions. Notable transactions include SkyBridge Capital’s acquisition of the fund-of-funds, hedge fund seeding, and hedge fund advisory businesses from Citi Alternative Investments LLC, and, most recently, a client’s acquisition of a significant interest in an $800 million diversified financial services company, which included a funds-of-funds.
