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ALTERNATIVES

KKR Prisma, PAAMCO to merge, creating $34 billion firm

Pacific Alternative Asset Management Co. and KKR Prisma will merge to form a new hedge fund-of-funds firm, PAAMCO Prisma Holdings.

The two businesses will be combined in a newly formed company, which will operate independently from KKR & Co., which will retain a 39.9% stake. The remaining 60.1% of equity in the new firm will be held by its employees, a KKR news release said.

KKR acquired Prisma Capital Partners in 2012.

PAAMCO Prisma will be co-led by Jane Buchan, PAAMCO’s co-founder, and Girish Reddy, co-founder of KKR Prisma and head of KKR’s hedge fund business. The new company will manage $34 billion.

PAAMCO and KKR Prisma investment strategies and staffs will not be combined and will continue to be managed from each firm’s head offices in Newport Beach, Calif., and New York, respectively, Ms. Buchan said in a joint interview with Mr. Reddy.

“We’re going to keep the brands separate,” she said, adding “while we share similar intellectual cultures, our investment processes are quite different.”

Mr. Reddy said product growth was one of the primary drivers behind combining the firms, noting that PAAMCO Prisma Holdings will build a joint investment platform for their disparate strategies that will enable easier collaboration between the two large, institutional hedge funds-of-funds managers.

Among the new strategies under consideration is risk factor-based investing, which would provide exposure to hedge fund beta at a much lower cost than a portfolio of direct investments in hedge funds. The new investment platform also will have the additional benefit of operational scale that was not a feature of each firm’s separate investment programs.

“We will combine the alpha engines of each firm and redistribute it” in different ways, Mr. Reddy said.

Henry Kravis and George Roberts, co-founders and co-chairmen of KKR, said in a joint statement in a company news release that “the decision to combine KKR Prisma with PAAMCO is based on our shared view that a larger enterprise with exceptional resources, technology and investment acumen will be even better positioned to support clients in today’s environment

Kristi Huller, a KKR spokeswoman, said terms of the deal were not being disclosed.