Hedgeweek Special Focus: Schroders pays USD 142 million to create funds of hedge funds business with USD 3.2 billion in assets under management

Michael Dobson has upped the exposure of Schroders to alternative investments by acquiring FoHF NewFinance Capital - Hedgeweek unravels the figures…

Schroders PLC has agreed to pay USD 101 million for London-based NewFinance Capital, which had USD 2.5 billion in funds of hedge fund assets under management at 31 December 2005. A further USD 41 million will be paid out if the unit meets certain revenue targets over four years.

Founders strike gold in three years

The trio that founded NewFinance in 2003 - Marc Hotimsky (ex-CSFB, owns 37 per cent of NewFinance), George Saier (ex-JPMorgan, also owns 37 per cent of NewFinance), Thorkild Juncker (ex-JPMorgan, owns around 10 per cent) - are expected to share USD 85 million of the initial USD 101 million that Dobson is paying for the business. They are all staying with the business and they also stand to share USD 35 of the USD 41 million that Schroders has agreed to pay if they meet their performance targets in the next four years.  

Rationale behind the deal

Michael Dobson, Chief Executive of Schroders said: "This acquisition increases our exposure to alternative investments, broadens our product offering to clients with a range of institutional quality funds and gives us critical mass in an asset class which we believe will continue to be in demand by high net worth and, increasingly, institutional investors."

He added: "We see the funds of hedge funds business moving away from high net worth individuals to mainstream institutional clients. It's a growth business that fits well with our own products'.

According to research from French business school Edhec, more than half of surveyed institutional investors in Europe invest in hedge funds, with an average allocation of 7 per cent of overall assets.

Like Schroders, many of the banks and asset managers involved in recent deals have acquired large FoHFs to quickly expand their funds of hedge funds offerings.

Combined operation will be housed in Knightsbridge

Founded in 2002, NewFinance Capital's clients include UK, European, Middle Eastern and Japanese institutions, distributors and high net worth investors. It had net revenues of USD20 million in 2005, a staff of 28 and is headquartered in London, with a research office in New York.

Schroders and NewFinance have agreed to combine their funds of hedge funds activities under NewFinance's management to create a global funds of hedge funds business with USD 3.2 billion of assets under management.

NewFinance will become a wholly owned subsidiary of Schroders. The company will continue to operate under the NewFinance Capital brand, with its managing partners and senior executives continuing in their existing roles.

NewFinance's existing Opus Fund range and investment process will remain unaffected, and Schroders USD 700 million AuM funds of hedge funds business will continue to be managed by the current 15-strong team before moving into NewFinance Capital's offices in Knightsbridge on closure of the deal.

Dobson's valuation disappoints sellers

The figures indicate that Schroders CEO Michael Dobson has valued the NewFinance acquisition at just 4 per cent of assets under management, with a further 1.6 per cent payable in four years.

This valuation appears significantly lower than the valuations of around 10 per cent being talked about in the industry just a couple of years ago, when performance was booming and volatility was in abundance.

This headline valuation will also act as benchmark for the further acquisitions expected this year and will disappoint some other large London-based funds of hedge fund groups who were looking forward to high valuations in a relatively bullish sellers' market.

ABN Amro Holding NV (ABN) in January bought London-based manager International Asset Management (IAM), to triple the size of its own unit to USD 4 billion, while Legg Mason bought Permal last year to add USD 20 billion AuM. Both deals are estimated to have been valued at over nine per cent of AuM.

Dobson said the "sweet spot" in his view is a fund of hedge funds business with USD 2 billion to USD 12 billion AuM. "Much above USD 15 billion-plus, you start to have capacity issues and over-diversity," he said.

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