(Reuters) - Kohlberg Kravis Roberts (KKR.N), the private equity company, has bought hedge fund money manager Prisma Capital Partners LP, marking the latest move by the private equity sector to boost assets by bolting on smaller funds-of-funds shops.
Founded by three former Goldman Sachs Group Inc (GS.N) partners, Girish Reddy, Thomas Healey and Gavyn Davies, Prisma uses a fund-of-fund strategy for an institutional client base of insurance companies, institutional investors, endowments, pension plans and family offices. More than 90 percent of its $7.8 billion in assets under management belong to institutional investors.
Reddy will run KKR & Co LP’s global hedge fund-of-funds business, working with KKR executives globally. Healey and Davies will become senior advisers to KKR.
Hedge fund managers create specialized portfolios from funds of funds that are designed to offset risk for a hefty fee, often about 10 percent of the profits, that are tacked on top of the individual managers’ fees.
Assets invested with funds-of-funds managers have fallen in the few last years, even though investments in the hedge fund industry as a whole continue to grow past the $2 trillion mark set last year.
Penny pinching investors, like the state of Massachusetts, are preferring to cut out the funds-of-funds middlemen in favor of less costly direct investments.
At the same time the industry still suffers a touch from the fallout of the Bernie Madoff scandal where some funds-of-funds, promising top notch due diligence, allocated money to Madoff’s Ponzi scheme.
This makes life for the smaller funds-of-funds tough while the biggest players on Wall Street, such as Blackstone Group LP (BX.N), which has its BAAM unit, appear to be having little trouble attracting institutional investors and using that money to help seed some of the industry’s potential new stars.
Over the last few years private equity firm TA Associates has purchased a minority stake in hedge fund-of-funds firm K2 Advisors and ahead of its initial public offering, Carlyle Group LP (CG.O) bought fund-of-funds group AlpInvest Partners and took a stake in long-short hedge fund Claren Road Asset Management.
As part of the KKR-Prisma agreement, all cash proceeds received by management at closing will be reinvested in Prisma funds. The money management unit of Dutch insurance company Aegon, which also helped set up Prisma in 2004, will sell its minority stake in the firm, but remains a significant investor in Prisma’s funds.
“Transactions like this investment by KKR reflect a trend,” said John Caccia, a partner in the Investment Management Group of law firm Skadden, Arps, Slate, Meagher & Flom LLP. “Investors are using a variety of structures...to manage objectives” such a balancing portfolios, performance and access to new top managers.
The deal is expected to close in the fourth quarter of 2012 with the Prisma investment team remaining intact and core investment operations and processes also staying the same. Prisma will continue to operate under the Prisma brand. Financial terms of the deal were not disclosed.
Goldman Sachs served as financial adviser to Prisma and Aegon. Schulte Roth & Zabel LLP served as legal counsel to Prisma and Aegon. Simpson Thacher & Bartlett LLP acted as lead legal counsel to KKR.
Reporting By Nadia Damouni in New York and Svea Herbst-Bayliss in Boston; editing by Andre Grenon and Leslie Gevirtz