Lots of talk, no action, on M&A rumor mill

The hedge fund-of-funds industry might be buzzing about which firm will be the next to succumb to the lure of a rich buyer, but for A-list companies, it's all just talk so far.

Among the hedge fund-of-funds managers that investment bankers and other sources said are at the top of the wish lists of acquirers — because of their institutional orientation — are Rock Creek Group and the lucrative minority stake that TA Associates Inc. holds in K2 Advisors LLC.

Other institutional hedge funds of funds that are getting a lot of scrutiny from potential buyers are Mesirow Advanced Strategies Inc., Dorchester Capital Advisors LLC, Arden Asset Management, Archstone Partners, Commonsense Investment Management LLC and investment outsourcer Strategic Investment Group, which manages a substantial hedge fund-of-funds portfolio.

Potential buyers are large, diversified financial services companies that need to add hedge fund capabilities “but find that they aren't quite ready to buy a single- or multistrategy hedge fund,” said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, Darien, Conn., a consultant to money managers. “There's more interest from many buyers in hedge funds of funds because, frankly, they're less scary than hedge funds.”

What these acquisition-hungry firms want are proven asset gatherers with traction in the institutional investment community.

“There are tons of hedge funds of funds out there, but it's really only the top quarter or even the top decile of managers that are going to be interesting to buyers from a strategic perspective,” agreed Ted Gooden, principal at boutique investment bank Berkshire Capital Securities LLP, New York.

But the upper tier of hedge funds of funds with loyal and growing institutional client lists is not taking the bait, at least so far.

Rock Creek has been the most frequent subject of industry rumor mills.

“All the big strategic buyers have looked closely at Rock Creek, but no one has struck a deal yet,” said one source, who asked not to be identified.

Industry chatter persistently places Ravi Singh, managing director and head of alternative investments at New York-based Credit Suisse Asset Management, as the buyer most interested in Rock Creek. Mr. Singh didn't return a call seeking information and Suzanne Fleming, a CSAM spokeswoman, declined to comment on “market rumors.”

Afsaneh Mashayekhi Beschloss, CEO and president of Rock Creek Group, dismissed the notion that her firm would be sold to Credit Suisse or any other company. Instead, she pointed to the firm's just-announced hire of Kenneth G. Lay, vice president and treasurer of the World Bank, as proof of a commitment to remaining independent and beefing up its investment team. Mr. Lay will focus on emerging markets investment management.

Rock Creek Group manages slightly less than $6 billion in hedge funds of funds for a 100% institutional client base.

Another acquisition on many a buyer's mind is purchasing the minority stake that private equity manager TA Associates Inc. bought in K2 Advisors in 2007 for an undisclosed amount.

“There's a lot of interest in buying TA Associates' interest in K2,” said Casey Quirk's Mr. Celeghin. “The big strategic buyers are definitely interested in getting that stake in K2 because they are bringing in so much money.”

K2 manages $9.7 billion in hedge funds of funds for mostly institutional clients.

But TA's holding is not on the auction block, said Roger B. Kafker, managing director and head of TA Associates' financial services business, Boston. “We're very happy with K2 and have no plans to sell our interest in the firm.”

But he agreed that “there's a very active acquisition market out there and we see that because we're competing with a lot of firms looking for whole or partial stakes in hedge funds-of-funds companies.”

“If you're a sizable firm with the right characteristics that fit the needs of large financial services companies, you're probably coming in for a fair amount of attention,” Mr. Kafker said.

Eric C. Weber, managing director and chief operating officer of Freeman & Co. LLC, New York, said he is talking “every other day” with hedge fund-of-funds executives who are “asking a lot of questions, checking out the possibilities. These are mostly toe-dipping conversations so far.”

Some of the small to midsize hedge funds of funds that were in play this year include:

c Montier Asset Management Ltd., acquired by Stenham Asset Management. Montier manages $420 million in four commingled hedge funds of funds and separate accounts;

c the $4.2 billion hedge fund management group of Citi Alternative Investments, acquired from Citi Holdings by SkyBridge Capital; and

c the three hedge funds of funds of Constellar Capital LLC, with $150 million under management, acquired by Gottex Fund Management Holdings Ltd.