Last week's news that Adveq was to be bought by Schroders may have left some scratching their heads.
Adveq, which invests capital in various private equity strategies through primary, secondaries and co-investment programmes, is to become part of Schroders, a London-listed asset management business with a market cap of £8.5 billion. The transaction will see Schroders acquire 100 percent of the share capital and Bruno Raschle, founder, chairman and majority shareholder of Adveq, move into a non-executive life chairman role.
There is nothing surprising about consolidation in the fund of funds space. Indeed it is a story that has been slowly playing out since the financial crisis; a perfect storm of rising operational and compliance bills coupled with increasing pressure on fees has conspired to put all but the largest fund of funds managers under commercial pressure. At the same time a number of LPs have taken private equity fund selection in-house.
The options seemed clear: merge, adapt or cease to exist. Adapters have repositioned themselves as multi-strategy, flexible solutions providers, adding credit and real assets programmes alongside core private equity businesses and moving further into secondaries. Those who have merged have found strategic partners with which to build their distribution firepower and share their operational costs. Names like Flag Capital Management, Squadron Capital, SVG Advisors and Parish Capital have all been subsumed into larger groups.
In February this year PEI broke the news that Unigestion, a Swiss asset management business with $23 billion under management but a relatively small private equity offering, was acquiring private equity fund of funds manager Akina. “Investors are looking for scale,” Unigestion chairman Bernard Sabrier told us at the time. “When we bid for large mandates from pension funds, endowments or sovereign wealth funds, they wanted us to have more AUM in that specific strategy.”
And so we come to the Adveq-Schroders deal. On some levels it makes perfect sense. It means a timely exit for 67-year old founder Raschle. And with $7 billion under management, Adveq is no mega-firm. It competes for mandates against firms with tens of billions in AUM and often more extensive global office networks and wider product offerings. It could certainly use the extra scale.
However, it is not a minnow, and as one London-based placement agent pointed out “we have seen consolidation over the years for fund of funds groups that would otherwise battle to exist, but Adveq has been doing well”. It has doubled its AUM since 2008 and developed a strong client base in Europe and the US and, as CEO Sven Liden told PEI in an in-depth interview in 2015, the firm had actually managed to increase its fees “in a market where everybody says funds of funds fees have gone down, down, down”. The firm has a reputation as an influential LP with access to high performing, in-demand managers and a good investment track record. Its 2008 Europe fund, for example, is a top quartile performer with a net IRR in excess of 12 percent, according to a market source. One oversubscribed GP, which Adveq has backed since its first fund, said the firm was well trusted by other investors who follow its due diligence lead.
There is no regulatory driver for the deal, Liden told us when we caught up with him last week, and the acquisition is about growing headcount rather than achieving synergies. “Basically people stay where they are to do the same jobs,” he said. “There is no overlap.”
So why tether Adveq to the Schroders brand? The answer, says Liden, is exactly that: the brand. He illustrates the issue faced by the firm using the old maxim that “no-one ever was ever fired for hiring IBM”.
“Schroders is a household name and obviously in many markets Adveq has not become a household name outside of the private equity world,” he says. “I think this is the main point where we will benefit from the transaction. Brand is very important in asset management and Schroders is obviously an excellent brand.”
The hope then is that the new Schroder Adveq name will open a few more doors than either of its constituent parts alone. Head scratchers will have to satisfy themselves with that.