Up to half of FoFs to disappear

Kimberly Romaine
28 November 2011

Tweet
Facebook
LinkedIn
Google plus
Send to

Consolidation is hotting up. But not all are created equal and as some outfits vanish, others will emerge. Kimberly Romaine reports.

Funds-of-funds may be the industry's latest endangered species, with a French family office reckoning a covert cull is underway.

"At least a quarter will cease to exist in the next couple of years, maybe even half," said the head of a family office that deals directly in the fund-of-funds business.

The need for scale and efficiency may be driving this, and it is already underway. Many believe the result will be a number of global, mega funds-of-funds, with a swathe of small, specialist funds-of-funds.

This may be symptomatic of the market malaise and not a true seismic shift in the industry. "If a management company has built itself up on a cost structure that requires raising at least as much as its previous vehicle - difficult in this environment for large-scale players - then the firm may need to band together with another player," says Michael Russell at Altius, a gatekeeper for 16 investors.

Downturns are renowned as catalysts for consolidation - and so far, it is many of the larger players coming together, rather than the smaller, more specialised outfits: "Large, multi-asset managers can afford to buy distribution channels now," says Eric Warner of Altius.

The market saw this at the beginning of this year, when AlpInvest was acquired by Carlyle Group. AlpInvest, with €32bn under management, is no small potato - indicating scale is not the driving issue. The news came a year after global blue chip fund of funds Pantheon - which manages more than $25bn - was acquired by Affiliated Managers Group (AMG) in a £500m deal - itself just a fortnight after the uber-consolidator announced it was investing in Artemis and Aston Asset Management. In fact, AMG has at least 27 so-called ‘affiliates' under its umbrella, and has been operating since 1994.

Consolidation is not new - Pantheon was initially acquired by Russell back in 2004. What is new is the pace at which funds-of-funds are changing hands. Last year, Hermes Private Equity and Gartmore announced a joint venture fund-of-funds, and an office has just been opened in Boston to cover the US market.

Of course regardless of size, performance is a major factor in the success of funds. unquote" has recorded four closes for European funds-of-funds in 2011 - all below €1bn: Altamar in Spain has held an interim close on €120m (target: €300m); Portfolio Advisors has held a final close on €776m for its sixth Swiss vehicle (ahead of target); Unigestion has raised €190m for its Secondary Opportunity Fund and F&C Climate Opportunity Partners has just hit €30m in a first close.

Maybe this is testament to the allure of smaller funds. For players in between this category and the large funds may find the going most difficult going forward.