Wed, Feb 10, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Expect to see surge in hedge fund M&A activity in Q4 says Madison Street

Friday, October 28, 2011
Opalesque Industry Update – According to Madison Street Capital’s “Fall 2011 M&A Outlook – Hedge Fund Industry” report, M&A activity in the hedge fund industry in 2011, as indicated by both the number and size of completed transactions, can best be described as sluggish. However, if last year‘s past results has any predictive value, we can expect a surge in activity in the fourth quarter that will likely spill over into the first quarter of 2012.

For instance, the current M&A Market conditions are very favourable for transactions. The sector has rebounded from an investor confidence point of view as both net investment flows as well as total Hedge Fund industry assets are at almost all-time highs. The fear that Hedge Funds would no longer be a viable asset class allocation are all but gone, and the recent market volatility suggest that that assets allocated will be even higher as investors turn to more sophisticated money managers to help navigate through this global economic uncertainty.

Another driving force has come from recent regulatory, legal and tax issues that have only served to positively influence the push for further consolidation. Being a SEC registered advisor has become a reality to many firms and so has the expenses associated with that. Overall, the cost of doing business today as a hedge fund manager is significantly higher than it was 5 years ago, and that is likely to increase as investors and regulators demand heightened transparency. For a smaller firm, entering into a strategic alliance with a larger firm can help eliminate this burden.

From a tax perspective, there are both old and new initiatives that might create unfavorable tax consequences for future sellers which ultimately may drive M&A activity now. This pertains to the tax treatment on carried interest and separately, the tax paid on the sale of the management company. In both cases, the current treatment is based on the lower capital gains tax, while there are those that are pushing for the application of the higher ordinary income tax rate.

While there is an increasing amount of Buyers and Sellers initiating dialogues, there are still significant obstacles that need to be addressed before coming to the proverbial deal table. For Sellers, the biggest concern is how will a strategic transaction help bring in distribution and result in bigger AUM? Also, how can they obtain full value for their firm while not relinquishing too much operational control? Is selling a non-controlling piece of the firm more optimal?

For Buyers, they want to know if the target HF manager can fill any shortages they currently may have on the product side. Further, can the acquired manager replicate performance and benefit from being able to focus more on executing investment strategy and less on the administrative, non trading responsibilities of running the business. Also, if the deal is on a minority basis, how can the investor assure that the target manager will deliver as planned?

For both parties involved, there are other non-financial issues that need to be considered, with cultural fit being on the top of that list. If the right connection does not exist between both teams, it will not matter how good the deal looks like on paper. In this industry that is particularly filled with headstrong personalities, people are the most important asset and lack of chemistry can be an instant deal-breaker.

That being said, assuming there is a cultural fit, almost all differences can be bridged through deal structure. Proper structuring will create goal alignment, incentives for both parties to succeed, and a partnership that create synergies across strategic, operational and management fronts.

(Executive summary of full report)

For full report: kdcunha@madisonstreetcapital.com

Madison Street Capital is an investment banking firm based in Chicago. that provides an integrated, full-service approach to both strategic and financial advisory which provides solutions to clients across the globe. Our industry specialists advise a wide array of Asset Managers on the entire spectrum of corporate issues including M&A Advisory, Portfolio Valuation (ASC 820 and IAS 39 compliant), Financial Restructuring, and Financial Sponsor Coverage. www.madisonstreetcapital.com

BG

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. How Einhorn survived a nightmare year[more]

    From Bloomberg.com: Even when a hedge fund has an awful year, which was the case for David Einhorn's Greenlight Capital, there are lessons to be learned. Many funds would have had a tough time surviving a year like Einhorn experienced in 2015, when all the stars seemed to align against him and Green

  2. Legal - Hedge fund founder wins early release in U.S. insider trading case, Gramercy seeking $1.3 billion from Peru over land-bond dispute[more]

    Hedge fund founder wins early release in U.S. insider trading case From Reuters/Streetinsider.com: Former hedge fund manager Doug Whitman on Tuesday won a reprieve from serving the remainder of his two-year sentence for insider trading after several judges expressed skepticism that his 2

  3. Investing - David Einhorn finds a winner in Michael Kors[more]

    From Thestreetinsider.com: Greenlight Capital hedge fund manger David Einhorn took his lumps in 2015. The fund lost over 20 percent on the year amid bets gone bad being long a plunging SunEdison and short a couple high-flying FANG stocks. However, today Einhorn is again showing his stock picking pro

  4. Investing - Avenue Capital's Marc Lasry: We like European bank loans, Comment: A bunch of hedge fund managers are chasing the 'dream of crushing a major structural problem'[more]

    Avenue Capital's Marc Lasry: We like European bank loans From CNBC.com: European banks are under immense pressure, but at least one prominent hedge fund has found what it thinks is a good opportunity in the wreckage. Marc Lasry, co-founder and chief executive of hedge fund Avenue Capital

  5. Credit Suisse cherry picks hedge fund ideas[more]

    From FT.com: Credit Suisse Asset Management plans to cherry pick profitable concepts from hedge funds with the launch in Europe of a “best ideas” strategy. The investment arm of the Swiss bank said the strategy will separate it from other funds blighted by “overcrowding problems”. It comes at a time