Bulking up: Consolidation in the LP space

Recent months have seen M&A and secondaries activity within the LP space building up a head of steam. Some such deals have originated as relatively hostile takeover bids, while others have come about as a result of consensus and shared interests. Whatever the individual factors at play, there appear to be few signs that the trend will come to an end any time soon, as the wider asset management space faces up to a multitude of challenges and a shifting landscape.

Since the start of 2017 alone, Schroders acquired Adveq Holding; Unigestion bought Akina Partners; LGT Capital Partners clinched European Capital Fund Management; and SL Capital Partners' parent Standard Life merged with Aberdeen Asset Management – the latter deal giving birth to a European asset manager with significant exposure to private equity. Viewed alongside 2016 deals such as HarbourVest's acquisition of the investment portfolio of SVG Capital, many LPs are taking the most direct route to increasing assets under management.

"We had quite a lot of consolidation taking place post-crisis, for very different reasons, where businesses that hadn't achieved enough scale struggled and were not able to raise fresh capital or generally sustain their infrastructure," says Warren Hibbert, managing partner at placement agent Asante Capital Group. "We're seeing another consolidation cycle taking place now, simply because you're now filtering out those groups that have not been able to achieve or sustain scale post-crisis, or demonstrate sufficient differentiation, and their fund economic lifecycles are reaching an end."

"Within the consolidators themselves, most have had a tough time digesting acquisitions because there hasn't been much attrition on the team front and it's been difficult to integrate new strategies and investment philosophies into their existing operations" – Warren Hibbert, Asante Capital Group

The drive towards consolidation in the asset management space as a whole has been widely attributed to downward pressure on fees and increased regulation. In theory, as fund managers increase the overall value of their assets under management, it should enable them to make efficiency savings where operations between two previously separate firms overlap in a post-merger scenario. Indeed, the merger of Aberdeen Asset Management and Standard Life – which will become known as Standard Life Aberdeen – is expected to lead to around 800 job losses, Standard Life said at the time. That total is reportedly equivalent to almost 10% of the consolidated company's workforce, and the move is intended to save a total of £200m per year. It is still unknown what the impact will be on the private equity activities of the new firm.

"There's been a race to the bottom in terms of fund economics on the funds-of-funds side," says Hibbert. "At the outset, groups could charge full fees – typically of around 10-15% carry with a 1-1.5% management fee – but today many are operating in a non-discretionary, advisory capacity, as opposed to a principal, discretionary capacity, because LPs have multiple options and in most instances can access most or any fund manager in the market. It's no longer an access game. As an LP, if you have money and hold yourself out as an investor, GPs will find you, so you're less likely to need an adviser to assist in finding the funds unless it's in far-flung frontier markets. The large LP advisers and funds-of-funds that have adapted and solved the primary constraint, which is largely pension plan team bandwidth and ability to properly diligence and rank the significant flow of GPs in the market, will survive and continue to grow market share as the market bifurcates further." However, he says the economics have adjusted significantly, arguing the market standard for fees would appear to be less than 1%, and that will not support a team with sub-$1bn in assets under management.

A factor that has been instrumental in the evolving role of traditional funds-of-funds – namely acting in more of an advisory capacity – is an increased number of institutional investors that have placed a greater emphasis on in-house private-equity-dedicated activity. In some extreme cases, pension plans and sovereign wealth funds have chosen to bypass the traditional private equity fund model altogether and have increased their focus on direct investment. Canada's Omers and Alberta Investment Management, Abu Dhabi's wealth fund and Singapore's GIC are just a handful of investors to have taken such action. Yet among the many investors that remain committed to the private equity fund model, some are turning away from the funds-of-funds space and increasingly sourcing fund managers directly.

"Many of the underlying pension plans that funds-of-funds had initially appealed to now have their own teams," says Hibbert. "Those that don't, or don't have teams with enough scale to manage the quantum of propositions landing on their desks, will use the large advisers – but these firms will typically provide the service at a market clearing price that squeezes smaller groups out of the market. They can afford to do it at those rates because they have $50-300bn in assets under advisory. The whole industry is moving from assets under management to assets under advisory, unless you're a specialist fund-of-funds able to deliver consistent returns well in excess of the market."

War of attrition
Hibbert also argues there is little evidence to date of the anticipated efficiency savings from LP consolidation taking place. "After the dust has settled on most of the consolidation plays we've seen take place over the past decade, the only difference seems to be the change in contact details of the people we deal with," he says. "The individuals' roles haven't changed significantly and, importantly, there doesn't seem to have been as much attrition in the teams as you'd expect in a drive to achieve synergies, which suggests we are not talking about economies of scale operationally, so much as pure scale in terms of assets under management."

As consolidation continues, it is reasonable to ask whether the evolution of larger funds-of-funds with wider strategies might increasingly diversify their investment strategy, hence diluting their focus on existing approaches. Some industry experts have suggested a separation is likely to develop between large-scale asset managers, focused on scaling up the sheer volume and overall value of assets under management, and boutique LPs that are primarily focused on service and performance.

Indeed, far from facing an existential threat, there are certainly counter-arguments to the suggestion that the fund-of-funds model itself is in jeopardy, as recent fundraises by Idinvest, Ardian, Hamilton Lane, Galdana Ventures and Qualitas Equity Partners show. Furthermore, according to unquote" data there were 12 funds-of-funds launched in 2016 with European investment remits – the highest total since 2009 – while the €4.09bn of commitments raised for the vehicles in question was also the second highest total during the eight-year period.

There is a threshold – perhaps at around the €5bn mark – under which you are considered small, and that's a very powerful reason for businesses like ours and Akina to come together" – Christophe de Dardel, Unigestion

Yet even at the lower end of the scale, there is evidence that investors are keen for fund managers to achieve a minimum of scale. In the aforementioned merger between Unigestion and Akina, scalability remained very much part of the equation. "We have, for a long time, felt that for many investors we didn't have enough assets under management, and that our team perhaps wasn't big enough," says Unigestion managing director and head of private equity Christophe de Dardel. He explains that, while the broader Unigestion framework has typically managed around €20bn in assets, the private equity division's assets under management have historically remained around the €3.2-3.3bn mark.

He says the firm itself has always believed its approach provides LPs with the benefits of a boutique service alongside the security of investing in a larger player. "We thought that would be a strong-enough message," he says. "But we did sometimes receive feedback that we were still viewed as a €3.2-3.3bn business. There is a threshold – perhaps at around the €5bn mark – under which you are considered small, and that's a very powerful reason for businesses like ours and Akina to come together. It has always been a little bit of a mystery as to why investors restrict themselves with a minimum level. If you are served by a boutique you have a quasi-guarantee that you will be given a lot of attention and a very good level of service."

Small is beautiful
Though Unigestion has itself undergone consolidation with one of its peers, de Dardel believes compelling arguments remain for the existence of smaller fund managers. Indeed, he argues that firms such as his are still attractive without having to squeeze fee structures, precisely because their smaller scale gives them access to areas of the market that are more difficult for larger players to serve. "When it comes to investing, if you target the smaller part of the mid-market, for example, where capacity is very often constrained, you can divide your available capacity between your clients," he says. "Every client receives a sizeable exposure to what they believe is the best fund in any given country, or the best fund employing a particularly strategy. If you are too big and are managing too many accounts it becomes very difficult to allocate that properly."

The merger of Akina and Unigestion is not merely a case of both firms looking to offer their investors the security of greater scale, nor is it about responding to tightening margins. While other LPs might be looking to streamline operations post-consolidation, Akina and Unigestion are very much reliant on their existing teams. From Unigestion's point of view, says de Dardel, the merger with Akina is a growth story – if there is an element of cost-saving associated with the wider consolidation of the funds-of-funds space, he argues the factor does not apply to their unification.

"Over the years, Akina built for itself a very clear signature as a European small- and lower-mid-market specialist," says de Dardel. "We had also moved towards the small- and mid-market. But while at Unigestion our private equity business has always offered a global exposure to Europe-based investors, at Akina it was the reverse: they have always offered European exposure to a broader base of clients, including many in the US and some in Australia. Combining both was absolutely perfect for us. We have roughly 200 clients combined and we have only around four clients in common. We had always grown our European, Asian and US investment platforms, and here with our Zurich-based colleagues from Akina, suddenly we have a lot more depth in Europe. We saw that it was something we could offer our clients, that we felt they would really appreciate – and actually they have."

The consolidation of the funds-of-funds space might raise questions as to the long-term impact on GPs looking to attract such investors. It stands to reason that there might be fears that larger players will be less able to commit capital to smaller funds, potentially creating a more challenging fundraising environment for private equity houses. Yet Asante's Hibbert does not foresee a long-term change in the types of vehicles that enlarged players will themselves look to raise, meaning by consequence that most will still retain their existing mandates, albeit possibly broader than they are today to cover a greater spectrum of opportunities. Instead, he explains, the most likely impact of consolidation on GPs themselves might happen when a merger takes place between LPs that have historically committed capital to very similar fund managers. In such instances, which might ultimately prove to be relatively rare, the consolidated LP in question could find itself with a choice to make about which GP it continues backing when it comes to recommitting capital to new vintages.

While there may be questions as to the merits of the extensive consolidation currently taking place, indicators point to the continuation of mergers and acquisitions within the LP space in the short term. However, the appetite of others to continue following the trail blazed by the likes of Aberdeen Asset Management, Standard Life and Schroders will very much depend on the extent to which the strategies are vindicated. "It's going to be interesting to see the extent to which the trend plays out," says Hibbert. "Within the consolidators themselves, most have had a tough time digesting acquisitions because there hasn't been much attrition on the team front and it's been difficult to integrate new strategies and investment philosophies into their existing operations – which, in itself, can become an expensive process."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• LPs
• Fund-of-funds
• Top story
• Funds-of-Funds
• Asante Capital