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Alternatives firms get gobbled up

Charles H. van Horne used a restaurant analogy to illustrate how offering all things sometimes is not best for business.

General consultants go after brethren to broaden bench

Alternative investment consultants are being snapped up by general investment consultants, a growing trend that some fear could result in increasing conflicts of interest and an insufficient number of specialist firms.

Consulting is a tough business with increasing pressure to lower fees. To grow their business, alternative investment consultants already have been moving into more lucrative money management.

This latest episode of consolidation is catching the attention of asset owners, primarily due to the increased possibility of conflicts should the much-bigger company press the alternative investment consulting group to sell lucrative investment products over advisory work, industry insiders say.

Alternative investment consultant acquisitions in the past 12 months include:

nGeneral consulting firm Pavilion Financial Corp. acquired alternative investment consulting firm Altius Holdings Ltd. in September. Pavilion already purchased Sacramento, Calif.-based private equity consultant LP Capital in 2014. Pavilion now has $60 billion in alternative assets under advisement.

nSeattle-based consultant Verus Advisory Inc. closed its acquisition of San Francisco-based private equity consulting firm Strategic Investment Solutions on Dec. 31, 2015. The combined firm has responsibility for more than $380 billion in assets under advisement. Eight months earlier, Verus started bulking up its alternative investment capability when it contracted with hedge fund and private credit consulting firm Aksia LLC to gain access to its hedge fund investment team and due diligence reviews.

Could be a downside

While consolidation might result in a bigger, stronger consulting firm with a wider scope of services, some institutional investors say there could be a downside.

Consolidation in the alternative investment consulting industry affects CalSTRS' ability to hire consulting firms, said Ricardo Duran, spokesman for the California State Teachers' Retirement System.

“Regarding consolidation in the alternative investment consulting industry, this may result in less service providers available and impact our ability to hire consultants,” Mr. Duran wrote in an e-mail. “It also necessitates clear roles and responsibilities, and a well-defined separation of duties.”

The $192.9 billion West Sacramento-based pension fund stands out among its peers in that it has “very clear roles and responsibilities for its consultants,” he said.

Other asset owners are taking a wait-and-see approach.

Pavilion's acquisition of New Mexico State Investment Council's private equity consultant LP Capital is relatively new, said Charles Wollmann, spokesman for the $20.6 billion endowments. Council members just started talking about the transition, he said. So far, the same consultants that worked with the council before the LP Capital acquisition have remained.

“We will look for red flags in regard to that relationship” as well as in regard to changes in service in coming months, Mr. Wollmann said.

Industry insiders say bigger consulting firms are increasingly adding money management services as a way to boost revenues.

“Smaller consulting firms are less likely to do asset management,” said Jeffrey Diehl, a managing partner and head of investments at Chicago-based Adams Street Partners LLC, a private equity fund-of-funds firm. “Larger firms are more likely to launch asset management as part of their maturation.”

Consultants that also manage money generally separate the groups that provide consulting services from the asset management division. However, there are still potential conflicts that have to be managed, Mr. Diehl said.

For example, the consulting firm's asset management arm could be competing with a manager that could be considered for a mandate by a client of the firm's consulting firm, or the asset management arm could get inside information on competitors from its consulting business.

Expand their offerings

Consulting firms also are buying alternative investment consulting firms to expand their offerings by providing specialty consulting services, such as private equity or real estate. That way, the general consultant also can serve as the asset owner's private equity consultant and double the firm's earnings, industry insiders say.

For instance, Verus acquired SIS to enhance its alternative investment expertise, said Jeffrey MacLean, Verus CEO, at the time the merger was announced.

Alternative investment consulting firms also are merging, creating larger firms that can service more alternative investment asset classes. One such deal came in August, when New York-based alternative investment consulting firm StepStone Group LP bought Swiss Capital Alternative Investments, a European private debt and hedge fund consulting firm. In May, StepStone hired KPMG's infrastructure consulting team, led by James O'Leary, head of KPMG's institutional investment advisory business.

With StepStone's acquisition of Swiss Capital and liftout of KPMG's infrastructure team, StepStone plans to launch private debt and hedge fund money management businesses. It is also offering infrastructure and real asset money management.

This consolidation trend could result in conflicts and competency issues. Asset owners are better served by independent alternative investment consultants that specialize in particular sectors, they said.

“In the case of private equity, and many alternative assets, specialized resources drive returns. It is like a restaurant. You don't necessarily get the best meal at a restaurant that serves too many kinds of food,” said Charles H. van Horne, managing director of New York-based private equity fund-of-funds firm Abbott Capital Management LLC.

It also raises issues of whether the larger firm has the track record and capacity to serve clients.

“One also has to think about the capacity of a chef and his/her resources. We've all had the experience of a restaurant that had a good reputation, but the meal wasn't up to par when the staff was stretched too far on a Saturday night.“

Consolidation can be good as long as the quality of the information remains high, said Gila R. Cohen, New York-based senior consultant, head of corporate strategy and client relations at real estate consulting firm Courtland Partners Ltd., who noted that there still can be pitfalls.

Pension funds can negotiate better prices from a consultant that provides services across asset classes, she said. “But you (can) lose the nuances and industry-specific knowledge that focuses on just real estate, for example, where deeper knowledge and insight is paramount,” she said.

This article originally appeared in the January 9, 2017 print issue as, "Alternatives firms get gobbled up".