The hedge funds-of-funds industry is contracting yet again with a merger of two big institutional players, a move that has some industry observers scratching their heads about the compatibility of the parties and wondering which firm will be next on the auction block.
Pacific Alternative Asset Management Co. LLC, Newport Beach, Calif., and KKR Prisma, New York, will combine in the second quarter to form a new hedge fund-of-funds firm, PAAMCO Prisma Holdings, with $20 billion of discretionary assets under management and $14 billion under advisement.
The new firm will be majority-owned by its employees and will operate independently from KKR & Co., New York. KKR acquired 100% of Prisma Capital Partners LP in 2012. KKR will retain a 39.9% stake in the new company.
Jane Buchan, PAAMCO's chief executive officer and co-founder, and Girish Reddy, a member of KKR, co-founder of KKR Prisma and head of KKR's hedge fund business, will become co-CEOs and co-chairpersons of the new firm.
The question of whether the PAAMCO-Prisma combination will thrive when past acquisitions and mergers in the industry have not is unlikely to deter hedge funds-of-funds executives looking for a lifeline.
“At the highest level, scale is of critical importance to hedge funds-of-funds managers,” said Jeffrey Levi, a principal at money manager adviser Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn.
“Mergers are a way for companies to gain and share operational infrastructure, distribution networks and costs,” Mr. Levi said, stressing that he expects to see “a pretty big phase of consolidation” among hedge funds-of-funds managers and traditional money managers in the very near future.
“I think you'll see straight hedge funds-of-funds consolidation or shifting of capabilities by these managers to add more multiasset class capability, liability-driven investment, hedge fund alternative beta and outsourcing-like products,” said Mr. Levi.
As for the effectiveness of the PAAMCO-Prisma working relationship, industry observers as well as the co-CEOs of the new company stressed that the two firms are very different in their approach to investment strategy.
“We're going to keep the brands separate,” Ms. Buchan said in a joint interview with Mr. Reddy. “While we share similar intellectual cultures, our investment processes are quite different,” she added.