Reluctant hedge fund managers eye M&A deals

Date: Thursday, June 11, 2009
Author: Laurence Fletcher, Reuters

The beleaguered hedge fund industry is rife with talk of consolidation, as dwindling asset bases eat into firms' profits, with the key barriers likely to be hedge fund managers' egos and poor rewards for sellers.

Man Group (EMG.L) and RAB Capital (RAB.L) have both indicated they are in the market for smaller hedge funds, while Cheyne Capital [ID:nLE579443] and GLG (GLG.N) have separately announced deals in recent months.

"Everyone is talking to everyone else, saying 'why don't you come in with us, we can have twice the assets under management and half the (combined) staff?'" Stuart McLaren, financial services partner at Deloitte, told Reuters.

For larger firms the downturn is providing an opportunity to snap up bargains, while managers that have seen assets shrink dramatically and find the hedge funds are no longer the lucrative business they once were may sell to a larger partner and keep running money or exit the industry completely.

"There appears to be fair number of investors out there with money looking to buy small and medium-sized hedge fund groups," said Odi Lahav, vice president at rating agency Moody's alternative investment group.

"Although many managers ... several months ago may have been very reluctant to sell their business, these are generally pragmatic individuals and if they're in a sinking ship or in a business which is just now too small to sustain itself, they will likely sell."

Investor outflows of more than $250 billion between October and March, data from Hedge Fund Research showed, have hit the asset bases of most funds, while fees have also come under pressure, meaning that combining or selling up may now be the best business option for many manager.

Mergers and acquisitions in the sector -- rare even during the boom years -- have picked up in recent months and more are expected.

"LITTLE OR NO CASH"

Man Group said in March it would look at investing in smaller hedge funds -- despite writing down the value of its 50 percent stake in credit specialist Ore Hill by $200 million -- and last month said its stance had not changed, although it noted buying firms was not the only way to add assets and teams.

Troubled RAB Capital, which has seen profits slump and assets fall to $1.5 billion in March from $7.2 billion at end-2007, recently sold its Northwest range of funds back to their founders, retaining capacity to add businesses and said it is looking at "the selective addition of strategies."

However, in an industry dominated by individual managers and executives, barriers to deals still remain. For instance, having built up a business during the good times, executives may be reluctant to see it absorbed by a larger firm.

"There are still a lot of egos and people want to be the consolidator rather than consolidated and no-one wants to sell at the bottom of the market," said Deloitte's McLaren.

"People will probably close down quietly rather than do a deal where it's obvious they're the junior partner."

While fund firms can sell for more than 5 percent of assets during the good times, prices are less attractive to sellers now.

"I'd characterize it as a buyer's market," Anne Gregg, a director at U.S. recruitment firm Alpha Search's Hedge Fund Consolidation practice. "There's little or no cash changing hands. It's often earn-out based."

Dale Gabbert, a partner at law firm Reed Smith, said: "I wouldn't assume people get a lot of money when they sell out."

"Managers may just earn more money working somewhere else," he said. "If you're a good trader and you run a $300 million portfolio, you're probably better off working at a bank."