M&A at funds of funds likely to decelerate, according to industry source

InvestorsLaunchesPeople Moves
01 Jun, 2012

M&A activity among funds of funds (FoHF) could potentially decelerate, according to an industry source.

“Asset outflows appear to be slowing down while the majority of large funds of funds businesses, which intended to restructure themselves, appear to have done so. I believe the market will become more settled. A lot of the biggest funds of funds are either bank-owned or want to stay independent,” said one hedge fund investor.

The last month has seen a wave of consolidations at bulge bracket funds of funds. Man GLG announced it would acquire FRM in a deal which is likely to create a $19 billion behemoth, making it the largest fund of funds outside of the US. Arpad Bussan, the flamboyant founder of EIM, also announced he was selling having seen Assets under Management (AuM) drop by 50% since the crisis to $7 billion.

Mid-sized funds of funds have also caught the M&A bug.  Switzerland-based Gottex Fund Management said it would acquire the $434 million Hong Kong-based Penjing Asset Management as it seeks to expand into Asia, while UBP purchased the $3 billion Nexar Capital Group in February 2012.

Credit Suisse’s 2012 hedge fund investor survey revealed 43% of funds of funds are looking to be acquired – a massive jump from 21% in 2011. The investor believed M&A at smaller funds of funds would continue as they further consolidated.

Substandard returns since the crisis and exposure to Bernard Madoff have hammered numerous funds of funds. Man GLG through its RMF fund of funds vehicle, UBP and EIM all invested in Bernard Madoff. EIM also had money in the Bear Stearns hedge funds, which tanked in 2007 as the mortgage market fell off the cliff.

“A lot of funds of funds have had to re-evaluate their business model. Madoff was the biggest test for many of these companies – one didn’t have to look far to see there was a fraud, while many industry figures felt Madoff warranted suspicion,” commented the investor.

Investors have voted with their feet and numerous funds of funds are feeling the pinch, as their traditional clientele increasingly allocate directly into single managers or via investment consultants. However, these outflows appear to be subsiding, as the investor pointed out.

Deutsche Bank’s 2012 Alternative Investor Survey showed 55% of investors were foregoing funds of funds and allocating directly, down from 62% in 2011, indicating a plateau in outflows.

Bear StearnsBernard MadoffCredit SuisseDeutsche BankEIMfunds of fundsGottexHong KongM&ASwitzerlandUBP