M&A Deals Reach Record High in 2005, Trend to Continue

Mar 3 2006 | 1:00am ET

By Deirdre Brennan 

Last year saw a record number of mergers and acquisitions in the alternatives space and the trend looks to continue in 2006 as institutional investors demand more products aimed at delivering alpha. According to a report released this week by investment bank Putnam Lovell NBF, buyers paid $6 billion to purchase almost $140 billion-worth of alternative assets last year—a large jump over 2004 when $84 billion-worth was snapped up in M&A deals.

Benjamin Phillips, a managing director at Putnam Lovell NBF and co-author of the report, said the majority of the firms that were acquired were fund-of-funds, which accounted for $87 million of the $140 million in purchased assets. “A lot of that is Permal and a lot of that is GAM,” Phillips said, referring to Permal Group, which was purchased by Legg Mason, and Global Asset Management, which was bought by Julius Baer. “But, a lot of that is a number of other vendors – nine or ten were sold during 2005, globally.”

Phillips predicts that fund-of-funds—even some of the less stellar performers—will remain key acquisition targets. “Demand for good teams that can assemble best-of-breed hedge funds is still going to be there,” Phillips said, “but we will start to see some of the weaker funds-of-hedge funds become targets by some of their bigger competitors who are looking to consolidate their position in the industry.”

Just last month, Cleveland-based KeyCorp, a large financial services firm, purchased Texas-based fund-of-hedge fund firm Austin Capital, allowing the firm to offer alternatives to its clients for the first time.

“Our clientele is essentially all institutional, so you are looking at a lot of demand, for example among pension fund sponsors, for some kind of exposure to alternatives,” said Ron Petrie, a spokesman for KeyCorp. “I think the term hedge fund is fairly vague in terms of what the contribution is to an investor.

We are really looking at products that are designed for risk management, to find products that are showing little correlation to the broader financial markets and generate good returns.”

Other recent consolidations in the industry include ABN AMRO Asset Management’s acquisition of International Asset Management; Bank of Ireland’s acquisition of a majority interest in Guggenheim Alternative Asset Management; and Vontobel Group’s purchase of a majority interest in Harcourt Investment Consulting.

Even with increased demand for alternatives, Phillips and many industry experts predict there will soon be a shakeout in the industry, which will result in fewer funds, although assets under management will continue to grow.

He said that the ones that will make it through have to be savvy and respond to market demands. “The types of funds-of-hedge funds that will survive are actually the next generation fund-of-hedge funds,” he said, describing these funds as offering a high-level of transparency and risk management. “They will spend a lot of time looking to see if they can get out of the plain old run-of-the mill sub-hedge fund and start looking at things like hedge fund separate accounts and additional types of vehicles that can replace traditional, single-manager hedge funds.”

Phillips said that Legg Mason didn’t buy Permal just because it was a fund-of-hedge funds manager, but because the firm has the people, the experience and the expertise to figure out what the next generation of alternative products will be. “That’s what’s driving some of these acquisitions,” Phillips said. “They are not buying exactly what is on the shelf now, but what has to be on the shelf in the next five years.” 

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