Sun, Jul 24, 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. Opalesque Exclusive: California-based manager launches long/short equity hedge fund with unique algorithm[more]

    Benedicte Gravrand, Opalesque London for New Managers: SJL Capital LLC, an investment advisory firm based in California, has launched its maiden fund, the SJL MarketDNA Hedge Fund LP. The fund, which began trading

  2. Manny Roman to move from Man to Pimco[more]

    Benedicte Gravrand, Opalesque London: Emmanuel (Manny) Roman, an investment world veteran, has been hired by PIMCO, the large US bond fund house, as chief executive officer. PIMCO's current CEO Douglas Hodge will assume a new role as managing director and senior advisor when Roman joins P

  3. HFR: Hedge funds post strong gains in mid-July as markets recover from Brexit losses[more]

    Komfie Manalo, Opalesque Asia: Hedge funds posted strong gains through mid-July as the equity markets continued the recovery from Brexit losses. The HFRX Market Directional Index gained +2.17% (+4.22% YTD) and the HFRX Global Hedge Fund Index gained +1.03% through mid-month (+0.19%

  4. News Briefs - Carlyle goes on trial for a financial-crisis meltdown, Private equity and venture capital outperformed public markets in 2015, Pippa Middleton gets engaged to hedge fund manager James Matthews[more]

    Carlyle goes on trial for a financial-crisis meltdown Carlyle Group co-founder Bill Conway was in court on this small island last week recounting one of the most bruising episodes in his private-equity firm’s history: the 2008 collapse of mortgage-bond fund Carlyle Capital Corp. Carlyle

  5. …And Finally - Two men fall off cliff playing Pokemon Go[more]

    From BizarreNews.com: Two men who fell from a seaside cliff north of San Diego told authorities they became distracted while playing augmented reality game Pokemon Go. Encinitas fire Battalion Chief Robbie Ford said one of the men fell about 50 feet down the bluff in Encinitas while the other man fe