Mainstream managers face cultural hurdle

Several US managers have acquired alternative investment strategists in the past year in order to boost their credibility before offering such products to retail clients.

But how they address cultural and organisational barriers will determine whether such transactions are successful, merger and acquisition advisers say.

For many fund management companies in both traditional retail and alternatives, the easiest way of entering the growing retail alternatives market is through M&A. Franklin Templeton Investments completed the acquisition of Pelagos Capital Management in June, building on an initial 20 per cent equity stake it purchased in 2010. Franklin also took a majority stake in fund-of-hedge-funds sponsor K2 Advisors Holdings last November.

Legg Mason has shown interest in hedge funds, acquiring London-based Fauchier Partners in March. The $6bn fund-of-hedge-funds specialist was combined with Legg's Permal unit.

OppenheimerFunds went in a slightly different direction, pursuing expertise in alternative asset classes. It completed the acquisition of SteelPath, an investment company specialising in master limited partnerships, in December.

In addition to large asset managers, multi-boutique investment companies are likely to be buyers in the alternatives market, M&A advisers say.

"We've seen a number of deals get done and I expect more deals in the pipeline getting done," says Brian Seidler, managing director in the transaction services practice at KPMG. These transactions could be full acquisitions as well as buying stakes in alternative managers. A number of factors are bringing potential buyers and sellers together. Traditional managers are looking for investment teams and strategies that have strong track records and would translate well into a liquid vehicle, such as a mutual fund or exchange-traded fund.

Alternative boutiques, meanwhile, see opportunities in a mass affluent market that is increasingly hungry for non-correlated strategies. "Hedge fund managers are viewing the registered fund space as a compelling opportunity to raise assets," says Aisha Hunt, a partner at law firm Dechert who works with hedge funds seeking to enter the registered fund market.

"The biggest value that traditional fund managers are bringing to the table for alternative managers is distribution, an existing wholesaling force with boots on the ground," Ms Hunt adds.

Yet a number of criteria must be met for a traditional manager to acquire an alternative boutique.

First, the alternative manager must run a strategy that can be translated into a liquid investment. For mutual funds, that means meeting the diversification and concentration requirements under the Investment Company Act. Managed futures and multi-alternative strategies have been shown to make such a transition, while others, such as traditional private equity funds, are less likely, advisers say.

Second, the companies must be philosophically complementary or at least willing to come to a common understanding. "The acquisition target's client base is still very much anchored into the institutional and high net worth network," says Aaron Dorr, managing director at Sandler O'Neill, an investment bank. "Also, the cultures are very different."

Primarily, the differences are around compensation and organisational structure, Mr Dorr says. Yet many acquirers are becoming more open to giving acquired units a level of independence, while combining resources where necessary. Asset managers appear to be taking their time in integrating acquired businesses. Franklin has focused on educating its sales force about K2 and its products, as well as beginning to cross-sell to existing clients, revealed Franklin Resources chairman and chief executive Gregory Johnson in a July call with analysts. The next step is preparing the retail side of Franklin, but Mr Johnson said the company was growing closer to offering K2's strategies in a registered product.

Fund management companies must be aware of the headline risk that comes with buying and owning an alternative manager. With several high-profile insider-trading scandals among hedge fund managers and the resulting increased scrutiny of private fund operations, taking the time to perform due diligence is critical, KPMG's Mr Seidler says.

© The Financial Times Limited 2013. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation