FRM Unit Plans $300 Million Investments in Hedge Fund Managers

Date: Wednesday, May 13, 2009
Author: Bei Hu, Bloomberg

FRM Capital Advisors Ltd., a unit of London-based asset manager Financial Risk Management Ltd., plans to make as much as $300 million of strategic investments in hedge funds this year, including its first in Asia.

FRM Capital may invest in six more managers in 2009, with two expected by June and its first Asian deal in the third quarter, Chief Operating Officer Patric de Gentile-Williams said. The London-based company makes strategic investments in hedge funds for two to four years in exchange for a share of their fee incomes for as long as 10 years.

Record losses and redemptions have cut hedge funds’ assets and fee revenue, making them more reliant on so-called seeders like FRM Capital. Some investment banks, insurers and private equity houses have exited the hedge fund seeding business amid the credit crisis, said de Gentile-Williams.

“Many of our top 10 competitors from a year ago have got out of the seeding space for reasons entirely unrelated to seeding but entirely related to their own organizational complications,” de Gentile-Williams said in a phone interview May 12 from London. “The pricing of deals has improved in favor of the seeders. You really get your complete choice of deals. We’re seeing lots and lots of very talented people.”

Investors redeemed a record $155 billion out of hedge funds last year and another $103 billion in the first quarter, according to Chicago-based Hedge Fund Research Inc. The withdrawals contributed to a 31 percent decline in global industry assets to $1.33 trillion by March from a mid-2008 peak.

Better Terms

In late 2006, seeders on average had to invest nearly $4 million in hedge fund managers in exchange for 1 percent of their revenue because fundraising from investors that paid fees was easy and competition was intense among seeding companies. The ratio has since dropped to “well below” $2 million for 1 percent of fee income, said de Gentile-Williams.

FRM Capital’s first investment was $60 million in August in Victory Park Capital Advisors, a Chicago-based hedge fund manager that finances small- and medium-sized companies using their assets as collateral.

It also invested in Beechbrook Capital LLP, a London-based manager of leveraged loans, at the end of last year, de Gentile- Williams said, declining to give the size of the investment.

“We expect on average to make six investments a year,” said de Gentile-Williams. “In 2008, we deliberately slowed the process. We didn’t like the market so we were very cautious. Now we’ve found managers whose strategies are robust to the current environment.”

FRM Capital was established in December 2007 as a division of the $10 billion fund of funds manager FRM. FRM Capital oversees more than $300 million and is seeking to increase the money available to seed hedge funds, said de Gentile-Williams.

Investment Size

Its investments in funds will range from $20 million to $100 million in size, he said. It expects to get 10 percent to 30 percent of the fee income in return, he added.

FRM Capital is in talks with funds run by stock pickers and equity traders that don’t bet on the overall direction of the market, and credit funds. In Asia, it may invest in a manager of Asian stock funds, de Gentile-Williams said, without giving more details.

This year, FRM Capital is looking at profitable funds that have lost assets as investors redeem out of the most liquid pools, he said. It also is seeing more opportunities to give money to hedge fund managers who have been in operation for a few years rather than in startups, de Gentile-Williams added.

“There are plenty of people who’ve done a good job for a couple of years but they’re running $20 million and haven’t managed to get traction with institutional investors,” he added. “They need institutional validation and momentum in their asset raising to get them through some psychological threshold.”

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net