Hedge Fund Acquisitions and Valuations - KKR Takes 24.9% Stake in Marshall Wace

Pre 9/9/15 market open, KKR announced that it will acquire a 24.9% stake in Marshall Wace, a UK-based hedge fund with more than $22B in AUM. Stock analysts were pleased by the deal, with one analyst lifting the price target by $1.50 to $29.00.

This is the latest in a series of private equity funds launched for the purpose of buying a minority stake in a HF's general partnership. The strategy is a push by alternative asset managers to diversify holdings and move further into HFs, which have significantly higher margins than the broad Asset Management industry (67 bps vs 12 bps in 2013). The HF industry continues to grow, and industry experts expect more acquisitions of stakes to come. These new investment funds are seeking to facilitate HFs in institutionalizing and expanding, as well as succession planning, and eventually providing a means of permanent capital options, possibly through an IPO.

PE shops are building and expanding teams for the purpose of valuing and investing GP minority stakes in hedge funds: Blackstone Ventures (seeding and investing), KKR Strategic Stakes & Seeding, Carlyle (began investing in 2008), and Dyal Capital Partners (a PE fund of Neuberger Berman) to name a few. However, these funds have had mixed results: Carlyle's Claren Road investment (initially $8.5B AUM) has faced nearly $6B in redemption request in the past year.

Not only have hedge fund track records been varied over the past years, but valuation is difficult for many reasons, including the lack of direct comparable public comps and transactions, the great difficulty in obtaining reliable inputs and assumptions (which could change far too easily) for a DCF, and the fact that many hedge funds revolve around the success of one manager.

However, the opportunity to take stakes in the asset class that produces 34% of alternative investment profits, while only accounting for 4% of alternative AUM, seems too good for PE shops to pass up. Additionally, given the compensation structure of hedge funds, including the stability of management fees, valuations of hedge funds are much less volatile than actual performance, with a 32% decline in performance resulting in only a 12% decline in estimated valuations, making a GP interest much more attractive than an LP interest.

I wanted to open up a discussion on the following:
- The general maturing and institutionalization of the HF industry
- The opportunity for GP stakes or acquisitions of HFs

I will be very interested to know what folks think.