Friday Letter: Merger madness

The manager consolidation industry insiders have been predicting kicked off this week with two very different deals united by a common thread: a solution for the seller equals a break into new markets for the buyer.   

It’s all happening now. Bridgepoint stunned the industry on Monday when it said it would create a lower mid-market arm by taking control of two funds worth £550 million, including £300 million of dry powder, and the related 11-person investment team from Hermes Private Equity.

 “I’d love to grow our AUM and add a new strategy in this way,” said one rival GP. “If you know anyone who might be for sale, let me know.”

While the bump in AUM is not to be scoffed at, Bridgepoint’s not exactly hurting for capital, having just closed its third pan-European fund on €4.8 billion. A firm spokesman characterised the move as “an opportunity to consolidate an already very good relationship with a key LP, and to go into the small buyout space – which is very active these days – with a team and funding”.

For Hermes Private Equity, which has committed to Bridgepoint’s last three funds and counts the BT Pension Scheme as its sole investor, the deal allows parent Hermes Group to focus on its £1.7 billion fund of funds platform. And – crucially – it paves the way for Hermes to build up a multi-faceted boutique asset management firm that raises third party capital without potential conflicts of interest, said a person familiar with the matter. Once its LP base goes beyond the BT Pension Scheme, running a fund of funds arm as well as a direct private equity platform will be increasingly perceived as a conflict, the source said.

The direct team could better maximise its potential if sat under the umbrella of an established European buyout house, said another source familiar with the situation. In addition to boosting deal flow and sharing resources, operating as a part of Bridgepoint makes the Hermes direct team more attractive to LPs wary of backing captive teams that may be more prone to spin-outs, key-man and compensation issues.

Very different issues, meanwhile, led US fund of funds HRJ Capital to have an investment bank shop it to half a dozen or so potential buyers – having already asked Probitas Partners to sell some of its (largely unfunded) commitments to US, European and Asian buyout funds, as well as some distressed and international venture assets. In the end, the firm struck a deal to be absorbed by Swiss private equity fund specialist Capital Dynamics.

(You can read more today on PEO about HRJ’s background, how it ran into liquidity issues, and why the firm and its $2.2 billion in assets was seen as an attractive opportunity for the Swiss.)

While these two deals may not be held up as the archetype for future consolidation in private equity, most market participants expect more to come. “I think it’s likely we’re going to see huge change and consolidation and it’s going to work at a pace that we can’t even predict at the moment,” said one London-based GP.