NEW YORK — Convergence in the alternative investment arena is likely to increase in the next 18 to 36 months, predict investment bankers at Freeman & Co. LLC, New York, in a new report.
As part of the tendency toward blending the lines among alternative investments, Freeman analysts think alternatives firms will expand into other areas — hedge funds adding private equity funds, private equity firms adding real estate funds and mezzanine funds starting collateralized debt strategies, for example. Firms will likely add capabilities through mergers, joint ventures, product expansion and team liftouts.
The best example of a crossover firm, according to the report, is The Blackstone Group, New York, which offers an array of alternatives from hedge funds of funds (with $9 billion under management) to private equity ($14 billion), senior debt (more than $2 billion in collateralized debt obligations), mezzanine financing vehicles ($1.1 billion) and real estate ($6 billion). While Blackstone has few competitors on its scale in alternatives, Freeman analysts singled out Mesirow Financial, Chicago, as a potential contender, with $6 billion under management in hedge funds of funds and about $1 billion in private equity.
Freeman researchers also think managers in every alternative asset class will begin to invest in securities outside their "normal" sphere of investment, with the most notable example the push by hedge funds into private equity. From the other side of the convergence equation — private equity managers moving into hedge funds — the analysts identified Auda Associates LLC, New York, which added a $1 billion hedge fund of funds to its existing private equity funds of funds, as a prime example. Private equity manager Hamilton Lane Advisors' acquisition of New York-based hedge funds-of-funds manager The Richcourt Group also was cited in the report as an example of the deepening trend. Hamilton Lane is located in Bala Cynwyd, Pa.
There's also been more straightforward merger and acquisition activity. The Freeman report said the third-quarter acquisition by JPMorgan Chase & Co., New York, of 85% of hedge fund manager Highbridge Capital Management LLC, New York, was most noteworthy. And while most deals of late have been large companies acquiring smaller hedge fund operations, Freeman researchers predict the dynamic will shift fairly soon with a number of alternatives shops combining their activities within a single firm to better leverage resources and geographic coverage under a single brand name.
The report's findings are based on a study by Freeman analysts of overall and institutional investor investment in alternatives, using data from Pensions & Investments' annual directory of the 200 largest U.S. pension funds, as well as other sources.