AEA, Aetos merger creates alternatives giant

The 36-year old New York private equity firm has agreed to merge with the private equity real estate and fund of hedge funds investor in a transaction that will create a company with combined assets under management of approximately $7bn.

In another sign of the increasing convergence between alternative investment managers, New York-based private equity firm AEA Investors has agreed to merge with Aetos Capital, a hedge fund of funds manager and private equity real estate investor, creating a combined company with total assets of reportedly $7 billion (€5.4 billion).

The deal, announced in a letter to investors, will create a diversified investment company with private equity, mezzanine, private equity real estate and hedge fund of funds capabilities.

Terms of the transaction, first reported in the Financial Times, were not disclosed.

The merger represents the growing convergence between alternative investment assets, as private equity firms and hedge funds increasingly broadening their investment scope. Large established buyout firms such as The Blackstone Group and The Carlyle Group have their own dedicated hedge fund and real estate investment arms, while hedge funds such as Cerberus and Perry Capital have been making concerted efforts to cross over into the private equity world. Over the past six months, Cerberus has announced the $2.3 billion acquisition of MeadWestvaco’s papers business and, along with co-investors Sun Capital and Lubert Adler and Klaff Partners, the $1.2 billion acquisition of the Mervyn’s department store chain.

AEA Investors, founded in 1969 by the Rockefeller, Harriman and Mellon industrial families, currently manages more than $1.7 billion in assets. The firm continues to derive much of its financing from wealthy individuals, although its investor base also includes institutions such as HSBC, which agreed in 2003 to invest $750 million in a new $1.2 billion AEA fund.

Aetos Capital was founded in 1999 by James Allwin, the former head of Morgan Stanley's investment management businesses. In October 2001, Anne Cascells, the former chief investment officer for the Stanford University endowment, joined Aetos to oversee the firm’s fund of hedge funds business.

As of December 31, 2004, Aetos had $3 billion of assets under management according to documents filed with the Securities and Exchange Commission, including $1.1 billion of assets in its fund of hedge funds business. Aetos Capital Asia, the firm’s $740 million private equity real estate fund, has acquired properties valued at $1.9 billion, primarily in the Japanese markets.

According to a source close to the deal, Allwin has been a member of AEA’s board for the past six months. Vincent Mai, the current chairman and chief executive of AEA, was introduced to Allwin about two years ago by Richard Fischer, the late former chairman of Morgan Stanley.

Mai will become chairman of the combined company, while Allwin will assume the title of chief executive officer.