Seeders' viability questioned in light of competition from accelerator funds
Seeders could be forced to re-evaluate their business model in light of growing competition from accelerator funds for investors, it has been warned.
“Seed deals are very few and far between. There are only a handful of seed deals each year. In turn accelerator funds have become more prolific and are offering better deals to managers in exchange for shares in fees. The biggest hedge fund seeders appear to be hoarding a lot of cash but hardly making any investments,” said an industry source who did not want to be named.
Accelerator funds are in effect early stage investors and tend to allocate to managers with around two years track record. Their investment terms and conditions are often less onerous than seeders in that they will not have as big a share of future profits.
“Seeders are in a dilemma. A lot of talent in the hedge fund industry is reluctant to accept the terms and conditions put forward by seeders, which have got more stringent post-crisis. When an investor looks at investing in an accelerator funds and looks at the 15% return for the risks taken compared with when they look at a seeding fund, which is investing into vehicles with start-up risk and no track record, the investor is going to expect a higher reward for risk. Often times, this is around 35% returns. However, this leads to a problem with managers because the 35% number is not attractive enough to get many managers over the line when the seed deal is proposed,” said the source.
Seeders’ value proposition to their own underlying investors is therefore under scrutiny if they are making a very limited number of capital allocations and potential managers are shunning their advances. Seeders are also in a bind because they cannot ease their terms and conditions for making initial investments into up and coming managers. Furthermore, they cannot increase the number of their investments because of risk concerns.
“One bad investment ruins a reputation so seeders cannot just increase their allocations. Seeders are facing huge pressure from accelerator funds and they do not really know what to do. Nobody really knows what seeders are going to do. However, if the market picks up, I believe seeding will return to normal levels,” said the source.