Madison Street Capital reports 42 hedge fund deals were closed or announced globally in 2015, exceeding the 32 transactions that closed in 2014. Additionally, 2015 transaction volume as measured by AUM was approximately 27% higher than 2014. Propelled by the wave of transactions in the fourth quarter of 2015, there are other key drivers creating deal momentum, positioning 2016 to be a record year in terms of hedge fund M&A transactions.
In summary, the report details the following:
Hedge fund industry assets are at an all time high despite the mediocre performance across most hedge fund strategies in 2015. While hedge fund performance lagged, institutional investors are increasingly making allocations to the alternative asset management sector in hopes of achieving higher required returns in order to match rising liabilities. Smaller hedge fund managers are struggling to attract new capital and therefore, are operating below optimal portfolio capacity levels. Overall, managers are incurring higher operational costs while at the same time facing downward pressure on fees. These factors are causing hedge fund managers of all sizes to consider strategic alternatives.
The deal environment for the hedge fund industry was strong in 2015 and will be even stronger in 2016. Structurally, we are seeing a variety of deal mechanisms being used to accommodate both buyers and sellers. Aside from traditional M&A, transactions are being structured as seed or incubator deals, revenue-share stakes, PE stakes, PE bolt-ons, etc. The highly fragmented hedge fund industry will continue to see consolidation, especially opportunistic partnerships that bridge distribution to product offering.