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Consolidation in the Fund of Hedge Funds Industry

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Consolidation in the Fund of Hedge Funds Industry PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY OCTOBER 2017 alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY EXECUTIVE SUMMARY he fund of hedge funds industry is in a Fig. 1: Fund of Hedge Funds Manager AUM by Region, 2007 - 2017 (As at June 2017) period of change. In recent years, the T 1,400 fund of hedge funds sector has contracted as investors broadly have moved capital 1,200 out of multi-manager vehicles in favour of 1,000 direct investment (Figs. 1 & 2). 800 798 Although most investors still maintain some exposure to funds of hedge funds, 600 563 both the proportion of investors allocating 400 to these funds (Fig. 3), as well as the amount of capital they direct to multi- 200 205 Assets under Management ($bn) Assets manager funds (Fig. 1), has declined. 0 30 As managers look to build value for institutional investors, an increasing Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 number of firms now look beyond Global North America Europe Asia-Pacific & Rest of World traditional commingled vehicles to offer Source: Preqin Hedge Fund Online alternative structures, additional services beyond asset management and an since the Global Financial Crisis (GFC). KEY FACTS increasing range of strategies. Mergers Amid a changing regulatory landscape, a and acquisitions (M&A) within the fund challenging performance environment and $5.4bn of hedge funds industry has allowed a declining investor base, fund of hedge Average size of merging fund of synergistic gains and provided rapid funds managers have looked to adapt and hedge funds managers at time of deal completion. expansion or diversification of merging or evolve in a bid to survive in an increasingly acquiring businesses. Hedge Fund Online competitive marketplace. notes 58 such deals involving over 100 $4.9bn fund of hedge funds managers completed As a result, we saw M&A levels within the Average size of acquiring fund of hedge funds managers at time of deal since 2008 as of June 2017. industry growing in the period 2008-2013 completion. (pages 4-5). During this five-year period, 2008-2013: GLOBAL FINANCIAL CRISIS much of the M&A activity was within $2.6bn TRIGGERS INCREASE IN M&A ACTIVITY Europe; however, over the longer term, Average size of target fund of hedge The AUM of the fund of hedge funds there is an even split between North funds managers at time of deal industry has been in general decline America- and Europe-based managers completion. Fig. 2: Fund of Hedge Funds Launches and Liquidations by Year Fig. 3: Proportion of Active Hedge Fund Investors with a of Inception/Liquidation (As at June 2017) Preference for Funds of Hedge Funds, 2013 - 2017 250 70% 207198 200 180 179 180 63% 62% 157 173 181 60% 60% 60% 150 136 136 135139 60% 102 10190 100 72 70 52 65 50% 50 31 34 10 0 40% -50 56 -100 30% -150 131 No. of Fund Launches/Liquidations of Fund No. 161 of Investors Proportion -200 170177166 20% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10% Pre-1997 Year of Inception/Liquidation YTD 2017 0% No. of Launches No. of Liquidations Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online 2 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/FOHF17 (40%). For instance, Man Group has had Fig. 4: Fund of Hedge Funds Mergers and Acquisitions over Time, a long history of acquisitions; during the 2000 - 2017 YTD (As at June 2017) period 2008-2013, it completed deals 12 11 to acquire GLG MMI (2010) and FRM Capital Advisors (2012). The latter is now 10 a $16.2bn entity currently investing in 8 8 8 over 100 hedge funds. Among the US- 8 7 based managers involved in M&A was California-based Franklin Templeton, which 6 5 acquired K2 Advisors in a bid to create 4 4 4 4 new investment strategies and broaden its of M&A Deals No. distribution capabilities. 2 2 2 2 2 1 1 2014: PEAK IN ACTIVITY If the GFC was the trigger for M&A activity 0 in the fund of hedge funds space, 2014 could be considered its peak. Of the 58 2000 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 M&A deals noted on Preqin’s Hedge Fund 2017 YTD Online in the nine years since 2008, nearly Source: Preqin Hedge Fund Online one in five were completed in 2014 alone. Until 2016, there were more acquisitions When looking at all fund of hedge within the sector than mergers; however, funds acquisitions globally since 2008, In 2014, Cantor Fitzgerald AM since Q2 2016, there have been two major the majority of targets for buyers are strengthened its asset management mergers within the fund of hedge funds within their own domestic region (Fig. 6); platform and expanded further into industry. EnTrust Capital and Permal Group however, Europe-based acquirers have alternative assets by acquiring Fintan joined forces to become the $25.2bn completed the most geographically diverse Partners. Merger activity during the year entity EnTrustPermal in Q2 2016. More acquisitions since 2008, with seven out of also included La Francaise AM and Tages recently, in Q2 2017, PAAMCO and KKR the 15 acquisition targets based beyond Capital, which entered into a strategic Prisma completed their merger to form Europe’s shores. partnership in a bid to strengthen their PAAMCO Prisma, with the combined unit position in Europe. managing $16.9bn as at June 2017. As Following these recent mega-mergers, as a result of these two deals, both groups well as the increase in M&A activity over 2015 – PRESENT: RECENT have now moved into the top 10 largest the past decade, Preqin takes a closer look CONSOLIDATION fund of hedge funds managers globally at how M&A levels have changed over Following the high levels of M&A in 2014, by AUM. Despite all four firms involved in time, the activity of various combined activity more recently has declined (Fig. 4); these mega-mergers being based in the entities since their M&A deal as well as the however, many of the deals that have been US, North America-based firms involved investors that are currently looking for fund completed in recent years have been of a in M&A are more likely to be part of an of hedge funds opportunities. large size, which has attracted much media acquisition than a merger, with firms based attention. in Europe or Asia-Pacific & Rest of World the most likely to be involved in a merger deal (Fig. 5). Fig. 5: Consolidating Fund of Hedge Funds Managers by Fig. 6: Location of Target Firm by Location of Acquiring Firm, Location and Deal Type, 2008 - 2017 YTD (As at June 2017) Deals Completed 2008 - 2017 YTD (As at June 2017) 100% 18 90% 16 32% 33% Location of 80% 37% 5 1 14 Target Firm 70% Target 12 Asia-Pacific & 60% Rest of World 32% 10 8 50% 29% Acquirer 39% 8 40% Europe 30% Merger 6 12 Proportion of Firms Proportion No. of M&A Deals No. 5 20% 38% 4 38% 6 North America 10% 24% 2 2 0% 0 North America Europe Asia-Pacific North America Europe Asia-Pacific & & Rest of World Rest of World Firm Location Location of Acquiring Firm Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online 3 alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY 2008-2013: MANAGERS LOOK TO M&A POST GFC here were 37 fund of hedge funds Fig. 7: Fund of Hedge Funds Managers Involved in M&A Deals by Location, 2008 - 2013 manager mergers or acquisitions T 18 completed in the six years following the GFC. While over the course of 2016 and 16 2 1 2017 YTD, high-profile mergers have 14 4 dominated the headlines, in the years 12 3 2008-2013, acquisitions grabbed more 9 headlines, despite a similar amount of each 10 8 deal type. 8 5 9 6 3 EUROPEAN ACTIVITY of M&A Deals No. Europe-based firms were the most active 4 1 6 6 6 during 2008-2013, accounting for half of all 2 5 3 3 firms involved in M&A deals (Fig. 8). Nearly 0 half (48%) of all firms acquired in 2008- 2008 2009 2010 2011 2012 2013 2013 were based in Europe, with the US (7 deals), UK (7) and Hong Kong (3) the most North America Europe Asia-Pacific & Rest of World targeted single countries in the period. Source: Preqin Hedge Fund Online Among the most active firms throughout this period, as well as in years to follow, and UBP Alternative Investments all of funds managers were based in Europe. was Man Group (Fig. 12). The London- completed domestic M&A deals during the In comparison, 70% of Europe-based based firm acquired three fund of hedge period. acquirers targeted domestic managers. fund managers between 2008 and 2013; the first, the landmark buyout of GLG NORTH AMERICAN ACQUIRERS 2012 saw Franklin Templeton acquire K2 Partners, marked a major strategic move Despite Europe completing the greatest Advisors (which at the time managed by Man as the London-based giant looked number of M&A deals between 2008 and $9.3bn in AUM) as the former sought to to diversify its product offering.
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