Infovest21 Special Research Reports

 

 

 

Seeders discuss bifurcated market, institutional interest, new players, asset raising and dry powder

 

A two-tiered market is developing in the seeding community. Only a few pedigreed managers will be seeded in the $100-200 million range since not that many seeders have the ability to allocate in that size range. Blackstone, Goldman Sachs and Reservoir are repeatedly mentioned as the largest seed allocators.

 

 

 

The less pedigreed managers will be seeded by the smaller seeding firms. Some of these smaller seeding firms are focusing on managers who haven’t been able to achieve sufficient asset size because they don’t have marketing or a robust infrastructure.

 

 

 

Seeders say Blackstone and Goldman are doing $100 million deals for 20% revenue share while the next tier is doing $50 million deals for 25% revenue share and marketing.

 

Some other trends that seeders see or expect are:

 

 

 

Limited number of seeding deals

 

“We don’t expect to see a huge number of large deals done. I would be surprised if there were more than 24 solid seed deals in 2012. There is not a huge increase in the number of transactions being done,”says Patric de Gentile-Williams, chief operating officer of FRM Capital Advisors.

 

 

 

Four to six seeding deals a year is typical and is not expected to increase. The amount of work done for one transaction is significant.  de Gentile-Williams adds, “Once you’ve done four to six a year, you’ve worked pretty hard. If you multiply that across the four to five [major] players, that comes to roughly 24 deals. Some may do fewer deals in a year.  You end up with a constrained universe.”

 

 

 

There is also a limit to the amount of capital that seeders want to allocate to managers. “There are thousands of people looking for capital in a year. You don’t want to give money to more than 2-5% of those. You want to limit transactions to the very best people. You don’t want to overcrowd,” says  de Gentile-Williams.

 

 

 

High deal quality

 

Chris Kelley of Moody Aldrich observes that with the Volcker rule, closing of prop desks, and reduction of Wall Street bonuses, an incentive exists for more employees at hedge funds and traditional firms to form their own hedge funds and build their own businesses. The quality of the deals is very high. The teams are robust with more historical experience. He says a manager that he seeded five years ago has become successful. He is now leaving that firm to start another hedge fund and so the seeding cycle starts again.

 

New seeding platforms

 

There is more interest in seeding. There are more focused players as well as traditional ones, says Kelley.

 

Due to the large supply of talent available, new seeders are springing up. As previously reported in February, Grosvenor Capital Management, with about $23 billion in assets under management, had raised about $400 million for the Grosvenor Emerging Managers Fund.  The seeding fund plans to seed seven to nine managers with $50 million to $100 million each in exchange for a 20% stake in the business. Grosvenor is most interested in long/short credit or long/short equity.

 

 

 

Direct Access also announced in February  that it was setting up an asset management unit to provide seed and acceleration capital to liquid, trading-oriented hedge funds through managed accounts. Their plan is to acquire existing multi-manager hedge funds. Negotiations are currently under way with potential hedge fund manager targets with the first deal expected in the first quarter of 2012. The funds could be offered to outside investors in a multi-manager product or as single-strategy managed accounts.

 

 

 

The Emergence Absolute Performance Fund, launched in January 2012, is an organization to guide and support entrepreneurial initiatives in the French market.

 

 

 

Cantor Fitzgerald hinted it may be getting in the seeding business when it acquired Cadogan Management at year-end 2011.

 

 

 

Managed accounts

 

Along with the new platforms are more joint ventures. A number of these hook up participants involved with managed accounts.

 

Seeding and managed accounts have evolved because managed accounts provide an easier way to get transparency and risk management. Managed accounts let institutions, who up to now wouldn’t have invested in the old LP structure, because they didn’t have transparency and liquidity, invest much earlier.

 

Todd Williams of Larch Lane observes, “The managed account platforms can attract a client base, they have a function and a purpose. There are potential benefits from risk aggregation, third party control mechanisms, reporting and transparency. We could see platforms continue to grow…It’s a natural extension and probably indicative of where you’ll see more seeders going.”

 

Asset raising

 

Seeders say asset raising has picked up in the first few months of 2012. 2012 will be better than 2011. The markets are up and are more positive in 2012 though it is still challenging. 

 

Kelley says Moody Aldrich has a formal program where they grow the managers and get paid for it. They bring the managers into investor meetings. Investors have the opportunity to co-invest.

 

Some seeders are developing formal asset raising programs. IMQubator, the Amsterdam-based seeder is developing a global network of independent capital introducers who will each have exclusivity with their top investors.

 

Kelley says dry powder, money to be invested with start-ups, may be $4-5 billion when you add up the major seeding programs. When you add the other one-offs such as Soros and offshore deals, it could be $10 billion.

 

This is an excerpt from Infovest21’s just-released Start-Up, Seeders, and Strategic Stakes Special Research Report.