This content is from: Portfolio

PAAMCO, KKR Prisma Combining to Form New Liquid Alts Firm

The two hedge fund investors have announced plans to get hitched, managing more than $30 billion in assets combined.

Call it a sign of the times. Funds-of-funds managers KKR Prisma and Pacific Alternative Asset Management Company are merging to form a new firm that will have more than $30 billion in assets combined, making it one of the three largest fund-of-hedge fund firms.

Private equity manager KKR will hold a 39.9 percent stake in the new firm, to be named PAAMCO Prisma Holdings. Under the terms of the agreement, the Prisma and PAAMCO funds will continue to exist as separate entities, according to a statement announcing the deal. PAAMCO CEO Jane Buchan and Prisma CEO Girish Reddy will be joint CEOs of the new firm.

“Over the years Girish and I have certainly known each other,” says Buchan, who co-founded PAAMCO in 2000. “We have been friendly competitors. I really admire his intellectual capabilities and what [he and his team] have done with their firm.”

A former partner with Goldman Sachs & Co., Reddy co-founded Prisma in 2003 with a group of other Goldman alumni. They sold the firm to KKR in 2012. The new deal would put Prisma at arm’s length from its former parent.

“As we look at the industry and where the clients are looking to move, we think there is a bigger scope for development of a broader liquid alternatives platform,” says Reddy. “If we combine Prisma and PAAMCO’s capabilities in a flexible format, I think we are very well positioned” for the changes to come, he says.

The merged entity will have 200 employees. The merger, however, only goes so far. Buchan is clear that the two firms will continue to keep their own identities while also collaborating.

“I’m still going to carry PAAMCO business cards and be CEO of PAAMCO,” she says. “Girish is still going to carry Prisma business cards and be CEO of Prisma.”

On the surface, at least, PAAMCO and Prisma appear culturally very different from one another. Irvine, California-based PAAMCO grew out of the old investment advisory and consulting business model and has made a name focusing in particular on developing and emerging manager mandates. New York-based Prisma developed out of the quantitative expertise and derivative trading backgrounds of its founders and was designed to be part of a new, more dynamic generation of funds of funds.

Reddy, however, argues that while the two firms may have different approaches to investing, culturally they are a fit in terms of values and structure.

Buchan agrees that the two firms have much to gain from one another. “I think it is a very nice complement,” she says. “There is no one else in the industry, regardless of size, that I would want to do this with.”

She also points out that both PAAMCO and Prisma launched with the backing of institutional investors, meaning that from inception both of these firms have institutional investing built into their DNA.

The hedge fund advisory and fund-of-hedge fund business models have struggled in recent years, owing to pressure over fees and changes in investors’ needs and demands. Economics of scale has become essential for firms as they look to satisfy the needs of an increasingly demanding global client base.

Both PAAMCO and Prisma made clear that the deal is not a cashing out by anyone involved. It is also, they insist, not a stepping back from liquid alternatives on the part of KKR.

“KKR was willing to take a smaller percentage for a bigger piece of the pie because they strongly feel that this will be a growth engine for the future,” says Reddy. He does, however, acknowledge that being out of the regulatory environment of a large alternative investment manager like KKR gives the new combined firm more flexibility and the ability to offer more liquid products.

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