Stakes In Hedge Fund Businesses In Demand As Blackstone Declares An Interest

By Simon Kerr, Publisher of Hedge Fund Insight

Once in a week is random, twice in a couple of weeks is a potential pattern, but three times in a month is confirmation. The first occurence was the sales of stake in insurance risk manager Nephilia Capital.  Kohlberg Kravis Roberts acquired a 24.9% ownership in the 14-year old firm in January. This was the second hedge fund related deal for KKR within a year, the first being Prisma Capital Partners in June 2012.

The second reference was of the purchase of a stake in Halcyon Asset Management by Dyal Capital Partners, a unit of Neuberger Berman. Dyal is a $1.28b private equity fund that takes 20% passive stakes in hedge fund management companies. Dyal Capital Partners already owns stakes Capital Fund Management, MAST Capital Management, Pinnacle Asset Management, Scopia Fund Management and institutionally hot manager MKP Capital Management. The latest stake bought by Dyal Capital Partners is in Halcyon Asset Management, a $12bn multi-strategy hedge fund management company that focuses on credit and distressed debt investing.

The third reference was that Blackstone wants to get in on the act. Blackstone Alternative Asset Management has had a history of being an early stage backer of hedge funds.  Going back over 15 years Blackstone Alternative Asset Management (BAAM) has put new and emerging managers into serious contention. Mostly this has been done via the Blackstone Strategic Alliance Funds, through which BAAM takes a 15-25% interest in the young hedge fund business and commits capital for investing to the fund for a number of years.  Using this mechanism Blackstone has put dozens of managers into commercial contention. For example Marcato Capital, Eric Bannasch’s Cadian Capital Management, Nick Taylor’s Senrigan Capital and Michael Hodge’s Hilliard Street have benefited from this kick start to their businesses, and more recently Taylor Woods Capital Management and John Wu’s Sureview Capital took this route.

Blackstone Alternatives now sees potential to get involved in a mature phase of the life of a hedge fund management group. Greg Hall, a Senior Managing Director at BAAM, stated this week, “It is a great time for BAAM to focus on investing in leading alternative investment firms. Hedge funds continue to gain market share within the asset management industry, founder-owners are focusing on equity values and succession planning, and there is little opportunistic capital to underwrite and purchase these ownership interests.” Blackstone expects their investments in hedge fund management companies to generate returns in excess of 20% per annum.

To put this into practice Blackstone Alternative Asset Management, which manages $45bn, is preparing a platform to purchase ownership interests in hedge fund businesses, and effectively monitor their interests thereafter. Through their human and technical resources, and accumulated experience with managed accounts and hedge fund accounting packages, BAAM has the investment, risk, due diligence and operational experience to carry this out as well as anyone. It is understood that BAAM has between $2-3bn to put to work to purchase stakes. To feed the machine they are building, BAAM needs the feedstock of managers willing to sell out. To help the hedge fund managers with their decision making BAAM has hired Anthony Maniscalco, the former Head of Alternative Asset Management within Barclays’ Financial Institutions Investment Banking Division. In his previous position at Barclays, Anthony Maniscalco was responsible for overseeing banking relationships with over 50 asset managers. It is his job to bring the managers in.

So in short order there have been sales of stakes in two sizeable hedge fund businesses, and a new monied buyer has declared. These follow on a number of deals completed last year, the most eye catching of which was the sale of a stake by the world’s largest hedge fund group Bridgewater Associates. Last year also saw deals done for stakes in BlueMountain Capital Management, Akros Capital, Flatiron Capital Management Partners, Securis Investment Partners, and QFS Asset Management, and for the whole of Tiburon Capital Management.

It can be no coincidence that this year the acquiring companies  (recent and potential) are each units of significant private equity businesses. The private equity industry typically operates with a spotlight – moving from sector to sector over time, but staying for a period on one spot with concentration. There is a spot/follow effect, whereby once one major private equity company has commenced activity in a sector the other players turn their spreadsheets to the same sector. If the private equity industry follows its usual pattern there is going to be a lot more negotiation with owners of hedge fund management businesses and more deal activity.