How the Aksia-TorreyCove tie-up aims to level-up LPs’ opportunistic investing

Aksia, an investment research and portfolio advisory firm, said last week it was acquiring alternative investments advisory and consulting firm TorreyCove Capital Partners in a deal expected to close in the first half of this year.

The new firm will advise on assets in excess of $160 billion – roughly $90 billion from Aksia and $70 billion from TorreyCove – and employ more than 240 people across offices in the US, the UK, Asia and Europe.

Aksia focuses predominantly on hedge funds and private credit, while TorreyCove specialises in private equity and real assets, as reported by sister title Buyouts.

Through the transaction, the joint firm’s private equity resources will increase by seven professionals in the near term. TorreyCove also intends to follow through with existing plans to hire two more private equity professionals in June, and the new entity is kicking off a search for a senior private equity professional, who will be based in London.

Private Equity International caught up with Aksia chief executive James Vos and TorreyCove president and chief executive David Fann – who will become vice-chairman at Aksia – to find out more about the transaction and what’s on the minds of LPs as they head into 2020.

What does this tie-up bring your respective LP clients?

James Vos: There’s much more motivation on the part of LPs to be more opportunistic and a little bit less bucket-oriented in how they think about investments. So, you might be looking at a situation, it might be a co-invest, it might be a special purpose targeted fund. Or it could be a strategy where it doesn’t really fall neatly into the private equity or the real assets or the private credit or the hedge fund bucket but it straddles two of those. We’ll be well-situated for opportunistic investing, which both helps out the LPs and it’s frankly fun to work on.

The next thing is sourcing. LPs want ideas: they’re sourcing, they’re smart, they’re looking for ideas, but they expect a steady flow of ideas from their advisory partners. Strengthening the global footprint, strengthening the net of coverage will enable us to show more new ideas to clients, and people like that. Whether they do them or not, it makes people smarter just to see more flow and ideas.

David Fann: We’ll have the ability to see the same transaction from a public markets perspective through the lens of Aksia’s hedge fund relationships and its the private credit business – almost every deal in the private equity segment today requires an element of private credit – and from the private equity perspective. So, there’s potentially three sources on every transaction in the private equity segment that we’re going to have a vantage point from, and they’re all going to be different inputs. That allows the clients to have a better understanding and perspective on transactions and should allow us to have better information.

Are LPs actually set up to invest more opportunistically?

JV: We’re starting to see some LPs set up opportunistic buckets. Often these have a portfolio manager responsible for that, but anything that goes into it is in some sense a joint venture between that person and other more asset class-specific people. I think it’s a really neat way to get the procedures, the governance and everything ironed out so you can put your best ideas into production. I’d say it’s a minority that are doing that, but it’s a growing trend. You didn’t see that five years ago.

DF: More and more chief investment officers are trying to find ways to achieve outsized performance and looking for the best risk-reward across the investment spectrum is critical. More and more programmes are expanding their asset allocations to alternatives and they are expecting service providers to bring not just a mainstream or middle-of-the-road idea but they’re challenging us to think outside of the box.

PEI’s recently released fundraising numbers show 2019 was the best year for PE fundraising since the 2008 global financial crisis. Will this momentum continue through 2020?

DF: None of us has a great crystal ball, but there is a momentum carry-over from last year; there’s going to be a number of large funds back in the marketplace this year again. What’s also astounding is the record amount of dry powder out there across all asset classes. For us, we think the key variables on the macro level might be interest rates and geopolitical aspects. But assuming no major changes to the environment we’re in, private equity continues to grow as an asset class. It is very popular with not just institutional investors but high net-worth individuals as well. I think some investors believe private equity is a good way to play defence in a long-in-the-tooth bull market.

What are LPs most concerned about?

DF: Fees, expenses, transparency – the same issues that have bothered them for the past five or six years. They want better alignment with the general partners, they also want to identify top performing managers. Average returns in private equity seldom beat public market numbers and so the only way to truly achieve alpha is to be in the top quartile, top third of performers, and we continue to see bifurcation where the best managers are five- to ten-times oversubscribed and the third quartile managers are struggling to get a fundraise. That becomes perhaps more extreme in the next couple of years.

The best funds are changing terms across the board, whether it’s economic or even related to fiduciary duty or fiduciary responsibility. We’re seeing a hardening of positions among the very best funds where they’re reducing the amount of fiduciary risk they’re willing to take. The divide is more pronounced than ever.

There are going to be a lot of continued GP-led restructurings, and that might be one of the biggest drivers of volume in the next few years. There are several firms that have the choice of either going out of business or trying to restructure the previous funds; we think most will try to opt to restructure their previous funds.

Is two and 20 under threat for the lower performing managers?

DF: Not necessarily on the sticker price, but managers will throw in concessions. There’s an increase in co-investment activity for instance through side-car vehicles or some other structured pool. Usually those are very low fee or zero fee – effectively that is a step-down in the pricing of the fund. If I give you a dollar for dollar co-investment vehicle, I’ve effectively lowered my rate by 50 percent. That’s a big inducement for investors to come into the fund. If I was a third-quartile fund and I said, ‘If you looked at my fees on an adjusted basis with that co-investment vehicle it makes it second-quartile’, obviously it helps the LP get there on an investment decision.