KKR to Combine Prisma With Paamco to Create $34 Billion Firm

Updated on
  • Employees to own 60% of Paamco Prisma while KKR holds 40%
  • Firm will seek to combine products, lower fees: co-CEO Reddy

KKR & Co. agreed to combine its Prisma hedge-fund unit with Pacific Alternative Asset Management Co. to create one of the world’s largest investors in hedge funds.

KKR will have a 40 percent stake in Paamco Prisma Holdings, which will manage about $34 billion, according to a statement Monday from the companies. KKR Prisma manages about $10 billion and Irvine, California-based Paamco oversees $24 billion.

“We are bringing together two leading names to create an even stronger liquid alternatives firm,” Henry Kravis and George Roberts, New York-based KKR’s billionaire co-founders, said in the statement.

Paamco and Prisma are firms that pick hedge funds to invest their clients’ money in. The deal, which is expected to be completed in the second quarter, will vault them to the higher end of the hedge fund-of-funds league, which is dominated by Blackstone Group LP. Blackstone’s business had $71.1 billion as of Dec. 31.

So-called fund of funds have lost some of their luster since the global financial crisis as investors bypassed them to invest directly in money managers. The hedge fund-of-funds industry manages about $633 billion in assets, down from its 2007 peak of $799 billion, according to Hedge Fund Research Inc. They returned about 0.5 percent last year.

Clients pulled $26.4 billion from the hedge fund-of-funds industry last year, the most since 2009 when investors withdrew $118.4 billion in the aftermath of the financial crisis. The underlying hedge-fund managers have come under increased scrutiny from clients amid high fees and lackluster returns.

‘Broader’ Needs

The management of Paamco and Prisma aren’t selling any ownership in the businesses, nor is KKR, according to the statement. Employees will own 60 percent of the new firm, with KKR holding the rest. Paamco Prisma Holdings will be led by co-Chief Executive Officers Jane Buchan, currently Paamco’s CEO, and Girish Reddy, KKR Prisma’s co-founder.

“As the industry consolidates clients are looking for broader solutions than currently exist -- they are looking beyond fund of funds, such as how we can combine products and bring the fees down,” Reddy said in a telephone interview Monday, adding that the new firm will have connections to 120 hedge-fund managers. “That’s where we see the puck going and we would like to be there and do it from a position of strength.”

Blackstone’s hedge-fund assets have risen 28 percent in the past three years. In addition to vehicles that allocate money to money managers, the New York-based firm’s assets include funds that give startup capital to new managers and buy ownership interests in hedge-fund firms.

By contrast, Carlyle Group LP last year decided to exit the hedge fund-of-funds space. The Washington-based firm shuttered Diversified Global Asset Management, which oversaw less than $2 billion in client assets, calling the market challenging for growth. Since then, Carlyle has also sold its majority stakes in two hedge-fund firms, Claren Road Asset Management and Emerging Sovereign Group.

KKR acquired Prisma Capital Partners in 2012. Prisma had about $7.8 billion in client assets at the time of the acquisition.

KKR has since acquired minority stakes in several hedge-fund firms, including Nephila Capital, energy credit manager BlackGold Capital Management and London-based Marshall Wace. In 2014, KKR liquidated an equity hedge fund after it failed to gain traction among investors amid middling returns.