Private equity fund of fund pioneer Partners Group has acquired two-year-old saisGroup AG, which specialises in hedge funds. Both are based in Zug.
Partners Group wants to do for hedge fund investment what it has done for private equity, which is to make it less risky, the company says.
The acquisition of saisGroup enables Partners to add a range of hedge fund products to its portfolio.
saisGroup was founded by three partners who left Credit Suisse Asset Management alternative asset management group in Zurich two years ago. Since then the firm has grown to seven people. All three become partners at the larger firm.
On the surface it appears that the only things the two firms have in common, besides being located in Zug, is that their products are alternative asset class of investment.
Managing a private equity fund of funds is a very different business to managing a hedge fund of funds. One is based on investing in funds that take a long-term approach to investment - the venture capital or buyout investors basically wants to see the portfolio firm only do well -- whereas hedge funds sometimes "bet" against a company.
Individual hedge funds often trade in an out of stocks on a daily, even hourly basis.
"I agree hedge funds are mostly- different from Private Equity investments, except for an overlap in distressed strategies," says Dr Jaeger. But the benefit of the merger of the two firms is that they will share back office operations and distribution channels.
"You often find private equity and hedge funds are managed in the same business unit in most institutions," points out Dr Jaeger.
Upcoming products include a "low fee, AA-rated capital protection that includes an annual coupon."
Rich fees from complex structures
Partners Group and saisGroup, along with Capital Dynamics, also of Zug, are a new breed of fund of funds vendors who are making the investment in the alternative asset class more secure by designing complex structures that lower the risk for investors.
Capital Dynamics, for example, was the first to securitize a private equity fund of funds in its Prime Edge Capital product. The young company raised 175 Euros for investment in private equity fund partnerships this year by offering equity and cash as collateral for a secured loan, known as collateralized debt obligation (CDO).
"This novel structure allows the fund's equity investors to leverage their exposure and it affords bond investors their first opportunity to diversify into private equity," writes a reporter in The Economist.
Both have packaged alternative assets investments for the risk-averse. Partners Group did some pioneering deal structuring with its Princess Fund by insuring the risk portion with major re-insurers. saisGroup launched the first fund of hedge funds worldwide that offered a daily liquidity based on net asset value.
saisGroup also offers products for Islamic investors, compliant with the Shari`ah law.
Packaging alternative assets in this way enables fund of funds managers, and ultimately the individual privately owned firms they invest in access to a larger pool of capital by opening up a complicated, illiquid, at times exclusive, asset class to a wider range of investors
The lower risk of course costs something in terms of higher fees and much more conservative returns. This is an aspect of these new products that opens them up to criticism from industry pundits.
There are a few layer of extra fees associated with management of publicly traded funds of funds, securitized funds, insured funds and so on. Publicly traded funds of funds have a host of associated costs, including annual, quarterly, and monthly reporting costs, lawyers fees, banking fees, broker fees. The fees come out of the returns.
But the cost has not deterred the demand. Partners Group expects to hire a further 15 new employees this year to handle its constant growth. It currently employs 90 people, 68 of whom work in its new glass and chrome building in Zug.
Investment bankers expect a spate of securitized private-equity deals this year. "Some of this activity will be banks scrutinizing their own lackluster portfolios, to get them off their books," says a commentator in eFinancial News published in London, adding that "some structures promise to be complex in the extreme."
by Valerie Thompson
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