How to avoid divorce in hedge fund M&A

Tue May 3, 2011

Email a friend
  • To include more than one recipient, please seperate each email address with a semi-colon ';', to a maximum of 5 email addresses



At least the divorce rate in funds of funds is not as high as in the Royal family


By Niki Natarajan

As Royal Wedding fever hit the UK, comparisons were being made between past and present performance - Kate Middleton vs Lady Diana Spencer - bets were being made on the global macro environment - would it rain on 29 April? - and, like good manager selection, Kate's suitability for the Royal portfolio was assessed. At stake was not just the happiness of two individuals but also the sustainability and long-term future of The Firm.

It seems that the ingredients that will make this Royal Wedding a success in future have a lot in common with the success or failure of M&A deals in the hedge fund space. The divorce rate in funds of funds is not as high as in the Royal family, though some - like Cadogan Management and International Asset Management - have been returning to singledom with what seems like glee.

But what is far more alarming is the mortality rate, which one can only assume is an unintended consequence of a merger. As Frédéric Neefs returns to the front line at Standard Life to try to turn Aida Capital into the success that the Green Way funds once were (see story), one needs to ask: "What happened to the award-winning excellence that were once Crédit Agricole's funds of funds?"

The once $26 billion business that was eighth in the December 2007 InvestHedge Billion Dollar FoHF ranking is now 17th, having merged its $9.3 billion funds of funds business with the $1.6 billion managed account platform. Amundi explained the post-crisis strategy allows it to focus on the increased importance of transparency, liquidity and control to investors - but is it a reactionary or evolutionary move?

The story is the same at Man, where RMF and Glenwood are now subsumed into what looks like a new managed account-based FoHF incarnation. The trigger was clearly 2008 and, in the case of RMF, a dash of Madoff, but behind Luke Ellis' recent return to the coal face is the unflinching belief in his end goal: to create the next generation of multi-manager investing.

The evolution of the funds of funds industry was discussed at length at our Global FoHF Forum in New York. It seems that in this post-crisis world there are two paths to the future: solving a problem or going for a goal. Both are likely to have unintended consequences, but which model has collateral benefits and which one is dogged with collateral damage?

In neuro linguistic programming, there is a concept called a well formed outcome. Key is setting the framework for change in positive terms and knowing what one wants an event to achieve. Irrespective of the quote in the press release, is the merger really about growing a business with similar values, beliefs and visions for the future, or is it just the sellers wanting to get out?

Having a positive, achievable goal with a purpose is only half the battle. Are the skills and support there and is vision shared by those needed to make it work? Most importantly, are the potential collateral costs and consequences acceptable?

Clearly the FoHF marriages that seem to be a success are Permal's to Legg Mason, Aurora's to Natixis, and for its duration - at least in performance terms - Coutts' business when it was with RBS. Now under Aberdeen, the ingredients for Orbita's happy marriage are there but, like with Will and Kate, only time will tell.

Ecology is the NLP term used to describe whether an outcome has acceptable costs and consequences. Sustainability is at the heart of building a long-term future, but does everyone involved want this? It turns out that performance is not the main reason many institutional investors buy hedge funds, making many of the assumptions that underlie M&A deals flawed.

So what are the basic ingredients of sustainability? Under the title, "Building a Sustainable Future", speakers at the InvestHedge Forum on 13-14 September will discuss sustainability of business models, infrastructure, incentive schemes, investments, performance leadership, succession and even investors.

ISSN: 2151-1845 / CDC10004H