Man-GLG deal signals start of hedge fund M&A wave

Date: Friday, June 18, 2010
Author: Reuters

Thousands of smaller funds, which have seen little of the industry's $30 billion or more of inflows since last summer and which are more reliant on generating good performance to earn fees, are under most pressure to join forces, fund bosses meeting here said.

Many are likely to be stretched to bear the costs of greater due diligence after the Madoff fraud and to meet looming European regulation and possible new U.S. tax rules while assets are still well below pre-crisis levels.

But Man's deal, which boosts its assets in manager-run funds and gives GLG access to Man's global sales network, shows most firms are still looking for ways to plug the gap left by $330 billion of net outflows in the year to June 2009, according to data provider Hedge Fund Research (HFR).

"Overall, we're going to see more M&A, especially in and around managers in sub-$1 billion funds space," Rob Mellor, UK hedge fund leader at PricewaterhouseCoopers, told Reuters on the sidelines of the annual GAIM International conference.

"At this level the manager's business is more sensitive to the need for performance fee and to the overall cost of doing business," he added.

Despite nearly 1,500 hedge funds shutting up shop in 2008 during the industry's biggest crisis to date, the $1.7 trillion industry still consists of around 7,000 funds and a further 2,000 or so funds of funds, according to HFR.

"It's a very fragmented industry. There's thousands and thousands of players. It's the kind of industry you'd expect to consolidate over time," said Kerry Stirton, partner at Red Mountain Capital Partners.

STAR TRADERS

Traditional fund firms looking for exposure to higher-margin portfolios may look for acquisitions in the sector, according to Yariv Itah, partner at investment management consultants Casey Quirk.

"Hedge funds are a primary target for any serial acquirer of investment firms. There will be more external ownership of hedge fund firms," he said.

In January, Aberdeen Asset Management (ADN.L) agreed a deal to acquire fund of hedge fund and multi-management businesses from Royal Bank of Scotland (RBS.L), while F&C Asset Management (FCAM.L) has acquired hedge fund assets through the purchase of London-based Thames River Capital.

However, working out ways to integrate businesses often dominated by a few star traders, who could in theory leave and take investors with them, can prove tricky.

"I don't know how consolidation is going to happen, but it has to happen," said Aarnout Snouck, director of AXA Investment Managers.

Locking in star managers over several years, as Man Group did with the three principals at GLG, may be necessary to prevent the erosion of a firm's asset base.

"You could have the buyout phased over time, you've got to think very carefully about how to structure the commercials. What you are buying is a people business, so the key is retaining the key people in the business," said PwC's Mellor.

Nevertheless, the risks may mean large firms, who are under less urgent pressure to make purchases after enjoying the lion's share of recent inflows, may try first to recuit teams before doing big deals.

"For the bigger firms, their first inclination might be to take teams rather than a whole businesses," Mellor added.