Alpha M&A Insights: An Ongoing Focus on Alternatives

Current Observations

Due to macro-economic drivers, post-crisis financial uncertainty and the increasing sophistication and demand of individual investors, alternative investing has gathered significant interest globally over the last few decades.

Since 2005, assets under management in alternative asset classes (such as real estate, private equity, infrastructure, originated loans, syndicated loans, hedge funds, liquid alternatives, etc.) in both the private and public market have increased annually at just over 10%, twice the rate of asset growth for traditional investment funds1. With this growth, small and large investment managers alike are strengthening their capabilities across the alternative investment landscape, with the aim of creating fresh investment opportunities for new and existing clients and generating new sources of capital.

Continued growth in alternative investments, which is expected to last for decades according to the World Economic Forum2, will continue to shape the business models of investment managers. Many institutional and retail firms have chosen to develop in-house alternative investment funds and hire fund managers with expertise in this field. For example, earlier this year Gresham House launched its first infrastructure fund to gain a foothold in the real assets market, emphasising how illiquid investments can generate “sustainable and attractive returns”3. Furthermore, whilst asset owners remain the most important source of capital for alternative asset managers, there are ongoing signs that asset owners are looking to acquire their own private market capabilities4. For example, in late 2015, PGGM and USS, with over $200 billion combined assets under management joined forces to acquire Spanish infrastructure company Globalvia Infraestructuras. Earlier in the same year, USS acquired Moto Hospitality, the UK’s largest service station operator and Co-op Bank’s portfolio of commercial loans in the renewable energy sector5.

Other firms have decided to acquire new capabilities, for example, Schroders’ acquisition of the $7bn private-equity firm Adveq6. Growth in private market investments specifically is one of the strategic priorities identified by CEO Peter Harrison and this acquisition underlines a commitment to delivering on this. Similarly, firms have acquired alternative asset managers specifically to build on and strengthen existing capabilities and consequently extend their competitive position. GAM announced the acquisition of Cantab Capital Partners (Cantab), an industry-leading, multi-strategy systematic hedge fund manager whilst simultaneously launching GAM Systematic, an investment platform dedicated to systematic solutions across liquid alternatives. Cantab was acquired to “form the cornerstone of GAM Systematic” according to GAM7. Arguably, this represents a tactical move as assets in newer categories such as liquid alternatives (including exchange-traded alternative funds) are growing at rates as high as 15% year on year8.

There are a range of key drivers for focusing on alternative assets and Alpha believes that these will hold firm for the foreseeable future. The next big decision for investment managers is whether a firm decides to build or buy their way into the market.

Key Considerations – Build or Buy?

Build

  • Benefits
    • Lower, immediate capital outlay due to premiums often placed on purchasing capabilities
    • Enables firms to control growth, culture, timing and development of the capability to fit wider strategies
    • Reduces the risk of over commitment into a new asset class as the firm can test propositions slowly and scale accordingly
  • Limitations
    • Will most likely take longer to launch and come to market than the acquisition of funds already set up
    • May be more challenging to prove capabilities and receive interest from investors due to a lack of experience compared to incumbents

Buy

  • Benefits
    • Quicker time to market depending on the speed of incorporation and integration with immediate access to clients and AUM
    • Pending suitable due diligence, delivers a trusted, market ready, mature offering which does not require training
    • Demonstrates intent and commitment to corporate strategy to the market and investors
    • Can facilitate the sharing of expertise across the new organisation
  • Limitations
    • Likely to be more expensive due to desk/firm price and integration
    • Integration challenges may arise (i.e. cultural, operational) which may require careful management

How can Alpha help?

  • Alternatives expertise: Alpha have been involved in multiple alternatives projects across all alternative asset classes, including real estate, private equity, infrastructure, originated loans, syndicated loans, hedge funds and liquid alternatives
  • Market scanning: Alpha can help clients to identify and secure the best opportunities in the market by combining our wealth of data on alternatives players with our proprietary market scanning methodology
  • Target Operating Model: Alpha have led many Target Operating Model designs and implementation projects, using our proprietary TOM, vendor selection and implementation methodologies to deliver the desired future state

 

Data sources (1) Financial Times, Apr 2016; (2) World Economic Forum, Oct 2015; (3) Fund Strategy, Feb 2017; (4) (5) Realestate.ipe.com, Nov 2015 (6) Financial News London, Jul 2017; (7)  GAM.com; (8) The Investment Association Annual Survey, Sep 2016.

We are seeing a continued growth in the focus of investment managers to deliver alpha through diversified investment solutions, leading many to react by developing and acquiring alternatives-focused expertise.”

 

Joe Docker, Alpha FMC Alternatives Practice Lead