DEAL WATCH: NO HEDGING HERE: ACQUIRER OPENS ITS BOOKS FOR AN IPO; ASSET ALLIANCE TO RAISE $100 MILLION IN STOCK OFFERING THAT WILL FUEL HEDGE FUND ACQUISITIONS

An acquisitive holding company for hedge fund firms has filed an initial public offering to raise capital to continue its buying binge.

New York-based Asset Alliance Corp., which owns 50% stakes of six hedge funds, including two pending purchases in late March (InvestmentNews, March 30), hopes to raise $100 million, according to documents filed with the Securities and Exchange Commission. About half the sum would pay for further acquisitions, while the remainder would repay debts stemming from previous stake purchases, the company reports. An estimated 6 million to 7 million shares are expected to be offered.

an indirect play

Asset Alliance may soon have company. Hedge fund acquisitions “will pick up a lot of momentum this year and next because there’s a lot of money sloshing around,” says Basil Regan, who manages about $250 million in hedge funds for his own New York-based firm and insists he has no interest in being acquired or being an acquirer.

“Historically, this is very unusual — to buy pieces of hedge funds,” he says. “You’ll probably see some people surface, one or two that have LBO backing, who will buy registered investment advisers and pieces of hedge funds.”

Asset Alliance is believed to be the first hedge fund firm to offer a piece of itself to the public. The move comes in the wake of several mutual fund companies that have filed for or issued IPOs, including, most recently, Federated Investors in Pittsburgh.

Asset Alliance’s IPO is “certainly an indirect play in hedge funds for average investors, because the minimum investment requirements are higher than the average investor can afford,” says Franklin Morton, director of research for Ariel Capital Management Inc., a Chicago-based mutual fund firm.

Asset managers certainly are a hot commodity in the public markets, trading on average at 25.6 times estimated 1998 earnings, vs. the 28.02 of the Standard & Poor’s 500 Stock Index. Compare that to securities firms, which trade around 17.8 times earnings.

Asset Alliance’s chairman, Bruce Lipnick, won’t comment on the filing, citing regulators’ mandated “quiet” period.

The 51-year-old Mr. Lipnick formed Asset Alliance in February 1996 with Arnold Mintz, chief operating officer, as a holding company that would emulate Boston-based United Asset Management. That $197 billion-asset company purchases mutual fund firms and maintains a hands-off approach with its fund managers. (Mr. Mintz is also Mr. Lipnick’s partner in Milestone Plus Partners LP, a hedge fund firm the two run themselves.)

With an estimated 3,000 hedge funds — including offshore funds –the industry is saturated, and a wave of consolidation is expected to take place. Moreover, with the typical hedge fund charging a management fee plus a performance fee, revenues are rising at a rapid clip during the bull market: The $399.5 billion in assets under management accumulated in hedge funds in 1997 was up 55.4% over 1996, according to Hedge Fund Research Inc. of Chicago.

not the biggest

Some firms are willing to sell out because they are often heavily dependent on a small group of individuals to both manage and market the firm, thus lacking the resources for stimulating growth and for performing costly back office operations.

Asset Alliance, which oversees about $1.3 billion through its hedge fund stakes, is not the biggest of companies, but it is backed by a few large investors. Itasca, Ill.-based Arthur J. Gallagher Corp., the nation’s fifth largest insurance broker, has about a 25% interest, and Citco Group Ltd., based in the British Virgin Islands, holds about 5%.

The firm reported 1997 net income of $439,000 on $8 million in revenues, according to the filing. But calculated on a pro forma basis — including revenues it would have gained had two acquisitions agreed to in March closed immediately — Asset Alliance would have reported a whopping $11.5 million in net income on $15 million in revenues — a theoretical 76% net margin.