SkyBridge's Citi buy gets ball rolling

Updated with correction

The acquisition of Citigroup's hedge fund management unit by SkyBridge Capital LLC is just the first in what investment bankers predict will be a buying spree of hedge funds-of-funds managers.

After two years in which hedge funds-of-funds acquisitions were few and far between, 2010 is shaping up to be the year when big money managers add companies that will give them hedge fund manager selection capabilities.

CEOs of institutionally oriented hedge funds-of-funds companies, who asked for anonymity because of confidentiality agreements, reported receiving many calls in the first quarter from investment bankers and potential buyers.

Asset managers much larger than SkyBridge also are in the market for healthy institutionally oriented hedge funds-of-funds managers with between $3 billion and $10 billion under management and absolutely no baggage, such as Madoff exposure or lingering liquidity problems.

Among firms identified by observers as being potentially very attractive to big buyers were Rock Creek Group, Mesirow Advanced Strategies Inc., Pine Grove Associates Inc. and Archstone Partners.

Observers said Ermitage Group is among the few actively trying to sell all or part of their firms. BNY Mellon Asset Management had been trying to sell its Ivy Asset Management unit prior to shuttering the business earlier this month, sources said.

Meanwhile, Corbin Capital Partners LP and Prisma Capital Partners LP reportedly are looking to build their asset bases through the acquisition of smaller hedge funds-of-funds firms.

Rumors have been swirling for the past few weeks about possible acquisitions of midsize to large hedge funds-of-funds companies by AllianceBernstein LP and Credit Suisse Asset Management. Company executives wouldn't comment.

Peter S. Kraus, who's been AllianceBernstein's chairman and CEO for about 15 months, is poised to make changes at the firm, including acquisitions, and has been especially keen in recent months on finding a hedge funds-of-funds manager, said industry sources who asked not to be named.

“Peter is an investment banker and this is how he knows to make changes,” said a consultant who requested anonymity.

“Diversified asset managers really are looking at hedge funds-of-funds acquisitions for the first time in some years. In 2009, everything was on hold as potential acquirers waited for various scandals and liquidity challenges to play out,” said Aaron H. Dorr, managing director and head of the financial institutions group at Jefferies & Co. Inc., New York.

“In 2010, there is growing interest among buyers ... Many have come to the realization that institutional investors face many hurdles in selecting hedge funds and that that risk is best intermediated. This is a strong endorsement for the hedge funds-of-funds model. Large asset managers that don't have hedge funds of funds are definitely out there looking,” said Mr. Dorr.

Kevin P. Quirk, a consultant to money managers, agreed that large managers definitely have their checkbooks out for hedge funds of funds. He added that the industry “already has consolidated considerably. The list has already been culled. Madoff and other scandals and liquidity mismatches have already knocked out a lot of firms.” Mr. Quirk is founding partner and principal at Casey Quirk & Associates LLC, Darien, Conn.

SkyBridge Capital, which runs a hedge fund incubation platform with $1.4 billion under management for a mostly high-net worth client base, has been in pursuit of a hedge funds-of-funds manager as a natural complement to its business, said Anthony Scaramucci, managing partner of the New York-based firm.

SkyBridge is acquiring the hedge fund management unit of Citi Alternative Investments LLC, New York, from Citi Holdings in a deal expected to close June 30. Terms are not being disclosed, Mr. Scaramucci said, noting that Citi Holdings will retain a revenue stream from the hedge fund business for a number of years.

CAI manages $4.2 billion in hedge funds of funds, hedge fund seeding strategies and pension hedge fund advisory business, about $2.5 billion of which is from institutional investors.

Mr. Scaramucci said SkyBridge does have a few institutional investors that invest in new hedge fund managers via the firm's seeding platform, but the firm's client base is more high-net-worth oriented. The addition of CAI's hedge funds-of-funds assets will be a welcome diversifier of SkyBridge's client base, he said.

The sale of CAI's hedge fund unit is “consistent with Citi's strategy to reduce non-core assets, tightly manage risks and optimize the value of assets in Citi Holdings, while working to generate long-term profitability and growth from Citicorp, which comprises the company's core businesses,” according to a joint news release.

Raymond Nolte, CEO of CAI's hedge fund management group, will become a SkyBridge managing partner and chief investment officer. Mr. Nolte's 20-person CAI team also will join Skybridge.

“We've been working on this deal for weeks now and we're very pleased to acquire a hedge funds-of-funds business of the caliber of Citi Alternative Investments. This has really been an underutilized resource within Citigroup because the performance of the hedge funds of funds has been very good and their institutional clients really have stayed with them,” Mr. Scaramucci said in an interview.

SkyBridge found the competition for CAI's hedge fund unit fairly intense. Mr. Scaramucci said three other bidders — which he declined to identify — actively vied for CAI's business.

The growing list of acquirers is a sign that “the unrequited buyer-seller love” that characterized most of the past decade is over, said investment banker Ted Gooden, principal at boutique investment bank Berkshire Capital Securities LLP, New York.

He noted that in 2000, “buyers wanted nothing to do with hedge funds of funds because they didn't understand them.” In 2005, “hedge funds of funds were desperately looking for buyers and found no takers.” In 2007, 2008 and 2009, “no deals were done because hedge funds of funds' profitability was down so much, no one wanted to touch them.” And finally, in 2010, “there's a backlog of interest and there could be a lot of deals done. It does seem that both sides are appreciating each other more,” Mr. Gooden said.