Sun, Dec 21, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Infovest21's new white paper says some large funds of funds may suffer slow death

Friday, July 27, 2012
Opalesque Industry Update - In its just released white paper, "What's Ahead for Funds of Funds?" Infovest21 examines the current environment for funds of funds; various ways funds of funds have been providing value; as well as opportunities, challenges and outlook for small, medium and large sized funds of funds.

Some of the highlights of the report are:

• Large funds of funds generally agree that funds of funds can survive at the $250-500 million level but become a real business once assets under management hit the $1 billion mark.

• Consolidation over the next 12-18 months will continue at the same pace or even faster than it has so far this year. Many funds of funds have been involved in discussions.

• The conventional thinking is that the largest funds of funds and smaller niche funds of funds will survive but the medium sized funds of funds i.e. those with assets between $1-9 billion will get squeezed. However, some consultants and large funds of funds find potential opportunities with this category. Some large funds of funds are looking for medium-sized funds of funds to add on that are lean and have a stable loyal client base. They are particularly attractive if they specialize in a specific strategy, have a different distribution or a different geographic investor base.

• Funds of funds with $1-2 billion in assets, that were never the recipients of institutional assets, have leaner organizations. With assets mainly from family offices and high net worth investors, they have fatter margins. They haven't been hit with the same magnitude of outflows as the larger funds of funds.

• Valuations are considerably lower than they had been. In 2010, valuations of funds of funds were around seven times EBITDA compared with ten times before the financial crisis.

• Some industry veterans say the old multiple-of-EBITDA model now looks passé. Most of the current transactions are being done on an earn-out basis with very little paid up front. Purchasers are unwilling to pay anything other than a revenue share.

• Some large funds of funds may suffer a slow death. Many businesses will fall apart before the principals do something strategic. Many of the principals pay themselves a big salary and will continue to do so. With institutional investors increasingly allocating directly with hedge funds, a significant part of their asset flow has now been cut off. Their margins are now very thin. It's hard for them to downsize now as it will signal to consultants/institutional investors that they are having problems.

• Many are waiting for the 2007 environment to return. They can't consider a deal today because they received large bids before the financial crisis.

• Faced with this situation, some of the larger funds of funds who have been hit with big outflows are looking at strategic transactions because they can rationalize cost, it pushes assets under management higher and it ameliorates the pain of redemptions.

• Consultants and institutional investors aren't always happy with consolidation and reorganization. They need reassurance that the team, investment process and investment approach will remain intact.Often times, when a consolidation or merger is rumored or announced, consultants and institutions place both parties on a watch list until the situation clarifies which could be 18-24 months.

• Looking out five years, healthy funds of funds will need $5-15 billion to be a real player, have the ability to seed their own products and have true, have interesting diversification, have enough partnerships with managers that they can get interesting things done, and have systems available to do efficient hedging.

• The healthy funds of funds will have a diversified asset stream - an advisory business, a Fund of One business as well as a commingled fund business. They will be able to sit down with the institutional client and determine their tolerance for risk; appetite for returns; need for transparency, liquidity and reporting. They will be able to build a product specifically to meet the clients' needs.

(press release)

For additional information, contact:
Lois Peltz, President, Infovest21
(212) 686 6440
general@infovest21.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. Investing - Big hedge funds win again on PetSmart, Riverbed, RBS sells real estate loans to hedge fund Cerberus, Talisman energy speculation: Which hedge funds could benefit?[more]

    Big hedge funds win again on PetSmart, Riverbed From CNBC.com: Another week, another set of wins for activist investors. On Sunday, pet supply retailer PetSmart agreed to the largest leveraged buyout of the year at $8.7 billion. Hedge fund firm JANA Partners had been pushing for a sale a

  2. Outlook - Hedge fund manager who remembers 1998 rout says prepare for pain, Bond guru Bill Gross predicts U.S. economic growth to dip to 2%[more]

    Hedge fund manager who remembers 1998 rout says prepare for pain From Bloomberg.com: Stephen Jen landed in Hong Kong in early January 1997 as Morgan Stanley’s newly minted exchange-rate strategist for Asia. He was soon working around the clock when investors began targeting the region’s

  3. Investing - Hedge funds get boost from healthcare in 2014, Paulson & Co takes stake in Salix on heels of inventory issues[more]

    Hedge funds get boost from healthcare in 2014 From Valuewalk.com: The healthcare sector started the year on a turbulent note, as stocks of many major biotechnology companies were battered. However, most of the players in this sector have bounced back. The BarclayHedge Healthcare & Biotec

  4. Opalesque Exclusive: U.S. legal receivables fund launched in August[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Investing in asset-backed receivables is a strategy that has been an integral part of the alternative investment space within the overall fixed income asset c

  5. Comment - High fees and low performance hit hedge funds[more]

    From FT.com: Disenchantment over high fees and lackluster performance may finally be turning the tide against hedge funds, fresh data suggest. Despite generally weak returns since the global financial crisis, hedge funds have enjoyed positive net inflows every year since 2010. This helped assets und