KKR to combine Prisma with Paamco to create US$34b investor in hedge funds

NEW YORK (BLOOMBERG) - KKR & Co agreed to combine its Prisma hedge-fund unit with Pacific Alternative Asset Management Co (Paamco) to create one of the world's largest investors in hedge funds.

KKR will have a 40 per cent stake in Paamco Prisma Holdings, which will manage about US$34 billion (S$48 billion), according to a statement on Monday (Feb 6) from the companies.

Paamco and Prisma are firms that pick hedge funds to invest their clients' money in. Prisma manages about US$10 billion and Paamco oversees US$24 billion.

"We are bringing together two leading names to create an even stronger liquid alternatives firm," Mr Henry Kravis and Mr George Roberts, New York-based KKR's billionaire co-founders, said in the statement.

The deal, which is expected to be completed in the second quarter, will vault them to the higher end of the hedge fund-of-funds league, which is dominated by Blackstone Group. Blackstone's business had US$71.1 billion as of Dec. 31.

So-called fund of funds have lost some of their lustre since the global financial crisis as investors bypassed them to invest directly in money managers. The hedge fund-of-funds industry manages about US$633 billion in assets, down from its 2007 peak of US$799 billion, according to Hedge Fund Research Inc. They returned about 0.5 per cent last year.

Clients pulled US$26.4 billion from the hedge fund-of-funds industry last year, the most since 2009 when investors withdrew US$118.4 billion in the aftermath of the financial crisis. The underlying hedge-fund managers have come under increased scrutiny from clients amid high fees and lackluster returns.

The management of Paamco and Prisma aren't selling any ownership in the businesses, nor is KKR, according to the statement. Employees will own 60 per cent of the new firm, with KKR holding the rest. Paamco Prisma Holdings will be led by co-chief executive officers Jane Buchan, currently Paamco's CEO, and Girish Reddy, KKR Prisma's co-founder.

"As the industry consolidates clients are looking for broader solutions than currently exist - they are looking beyond fund of funds, such as how we can combine products and bring the fees down," Mr Reddy said in a telephone interview on Monday, adding that the new firm will have connections to 120 hedge-fund managers. "That's where we see the puck going and we would like to be there and do it from a position of strength."

Blackstone's hedge-fund assets have risen 28 per cent in the past three years. In addition to vehicles that allocate money to money managers, the firm's assets include funds that give startup capital to new managers and buy ownership interests in hedge-fund firms.

By contrast, Carlyle Group last year decided to exit the hedge fund-of-funds space. The firm shuttered Diversified Global Asset Management, which oversaw less than US$2 billion in client assets, calling the market challenging for growth. Since then, Carlyle has also sold its majority stakes in two hedge-fund firms, Claren Road Asset Management and Emerging Sovereign Group.

KKR acquired Prisma Capital Partners in 2012. Prisma had about US$7.8 billion in client assets at the time of the acquisition.

KKR has since acquired minority stakes in several hedge-fund firms, including Nephila Capital, energy credit manager BlackGold Capital Management and London-based Marshall Wace. In 2014, KKR liquidated an equity hedge fund after it failed to gain traction among investors amid middling returns.