Excerpt from FactSet Flashwire News

LONDON – Acquisitions of financial sponsors (hedge funds, REITS, private equity firms) have continued through the credit crunch, and hedge funds might be a more likely target than most now that hedge funds are at their lowest levels in seven years.

Last week, Swiss banking group EFG International agreed to acquire UK hedge fund Marble Bar Asset Management LLP. EFG is paying $517 million immediately, then $300-800 million based on performance in the next six years. In aggregate, the deal could be worth up to $1.3 billion.

No doubt the $4.4 billion injection of Marble Bar’s assets under management deepens EFG’s foray into the alternative investment world, but with financial buyers at a low point compared to a few months ago, it’s an interesting time for EFG – which was previously a traditional bank – to delve into the more risky environment. Now 18% of assets managed under EFG are in hedge funds. And it should be repeated that the most recent global hedge fund index is showing the worst returns in seven years.

Looking at the deal, though, EFG paid about ten times expected earnings – assuming it will make the projected $80-100 million – which isn’t that steep of a price. But will it hit those numbers?

Following Marble Bar’s ownership back in time, it’s been one handover after another: the fund started with two Kyte Securities bankers buying out a Kyte fund. They sold a 20% stake in the business to Lehman Brothers a couple years ago. And the Lehman chunk is being bought out by EFG and Lehman is getting about double what they paid for it.

The biggest question now is what should EFG do with the firm and its management?

Looking at JP Morgan’s acquisition of hedge fund Highbridge Capital Management a few years ago may provide some insight.

“With the Highbridge buyout, JP Morgan had a huge asset management arm, but they kept everyone in place after they took over, and it’s done very well for them,” said a London-based spokesman for a major bank who preferred to remain anonymous.

Morgan Stanley has been on an acquisition spree this year, buying all or part of hedge fund FrontPoint, hedge fund Traxis Partners, investment group Lansdowne Partners, and distressed investor Avenue Capital.

“Usually the buyer is after the team, the track record and the investors, and they’re paying handsomely for it,” said Felix. “Sometimes the principals of the firm being acquired only stay a few years, sometimes at their choice, other times because once their business has been assimilated the guys who bought them feel they don’t need them, don’t want to pay them and just want to run things the way they want to,” said Felix.

“The big challenge with such acquisitions is that the key assets are people who can walk out the door,” said Josh Lerner, Professor of Investment Banking at Harvard Business School. “In many cases, the value of the ‘brand’ and organizational structure is often very low – far less than in investment banks or law firms. Thus, the challenges with acquisitions of PE groups are quite substantial.”

For this reason, minority purchases make far more sense, like Abu Dhabi’s sovereign wealth fund Mubadala Development Co’s acquisition of a 7.5% stake in The Carlyle Group, which it took this September for $1.4 billion.

Out of the 948 buyouts of financial sponsors this year, 212 were minority purchases.

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