Private Advisors Buyout Could Be Harbinger

New York Life Investments on Dec. 2 agreed to buy a 60-percent stake in Private Advisors in what could be a harbinger of further consolidation in the fund of funds industry.

Terms of the deal, which is expected to close Dec. 31, were not released. Private Advisors equity holders, including founder and managing partner Louis Moelchert Jr., will retain a 40 percent stake, while the Private Advisors management team will continue to manage assets semi-autonomously.

Many industry professionals have anticipated a shakeout in the private equity fund-of-funds industry. New players have proliferated in recent decades, and growing competition has put pressure on the fees charged clients, said Lyons Brewer, founder of LB Group LLC, a Westport, Conn.-based placement agency. “The reason that Private Advisors has to go to a larger multi-strategy like New York Life is to get economies of scale,” Brewer said. “This deal further underlines evolution and sophistication of private equity in the U.S.”

On the same day as the deal announcement, in fact, Indian financial services firm Religare Enterprises Ltd. announced that it would pay $171.5 million for Landmark Partners, a Simsbury, Conn.-based secondary buyer and fund-of-funds manager. It would be the second fund-of-funds investment this year for Religare, which in February bought Northgate Capital Group LLC of Danville, Calif. Earlier this year, Affiliated Managers Group acquired fund-of-funds manager Pantheon Ventures Ltd. in a deal with an estimated value of $775 million.

Moelchert told Buyouts that Private Advisors has had “many opportunities to consider other potential partners,” suggesting there were a number of buyers interested in the asset class. “I think there is a danger that firms can get caught without the financial ability to continue to grow and can just get squeezed out of the market over [a] period of time,” he said. “Many of our competitors are no longer in existence.”

Private Advisors had a few setbacks this year, namely in Europe, where it scrapped a fund-of-funds plan and lost a few executives. Firm co-founder Rafael Astruc also resigned earlier this year. “When you go through market periods that are as unsettled as last few years have been, this should give our LPs greater certainty,” Moelchert said.

New York Life’s investment provides more certainty to Private Advisors’s limited partners, and it should be able to provide seed money for future products, Moelchert said. The European fund-of-funds effort probably would have been successful with the backing of a big institution like New York Life, he added. “If we had had [a] substantial limited partner that would’ve provided seed money, I suspect that we’d have had that up and running today.”

For New York Life, the main attraction to Private Advisors came from its hedge fund of funds operations, a niche to which New York Life did not have any exposure, said Yie-Hsin Hung, who joined New York Life as the CEO of alternative investments, a new position, in November.

Moelchert and Hung expect the Private Advisors team to collaborate with New York Life’s existing private equity fund-of-funds group, New York Life Capital Partners, by sharing info about prospective investments.

Hung said New York Life is not looking to buy other fund-of-funds managers. “We are looking to Private Advisors to be our primary offering in the hedge fund of funds arena.”