KKR Expands into Fund of Funds By Buying Prisma Capital

   By Amy Or 
 

NEW YORK--KKR & Co. L.P. (KKR) has expanded into the fund-of-hedge-funds business by acquiring Prisma Capital Partners LP, which managed $7.8 billion of assets as of April 1.

The deal, whose financial terms weren't disclosed, is expected to close in the fourth quarter.

The Prisma acquisition is KKR's latest effort to expand beyond its traditional private equity operations and build up its hedge fund capabilities.

KKR brought on a team of former proprietary traders from Goldman Sachs Group (GS) last year to run an equities hedge fund. The fund started operating early this year.

KKR managed $62.3 billion in assets as of March 31, about three-quarters of which were in private equity. The other quarter was in public market investments, including liquid credit and mezzanine funds.

"Many institutional investors are seeking more liquid alternative investment products, and we believe customized hedge fund solutions play a key role in meeting that need. This makes Prisma a good fit for KKR and we're pleased to welcome the team," said Henry Kravis, KKR co-founder and co-chief executive, in a statement.

But the private equity giant's focus on its hedge fund business has lagged behind peer Blackstone Group (BX), which has already gained much traction with its liquid alternative investment franchise. Blackstone Alternative Asset Management, or BAAM, managed $43 billion of assets as of March 31, a huge jump from about a couple of billion in 2000 and almost double the approximately $23 billion it had at the end of 2008.

Apart from a prominent asset allocator in hedge funds, BAAM is also recognized in the industry as an active hedge fund seeder which provides emerging-company managers with start-up funds.

Like its equity hedge fund team, KKR's latest acquisition target was also founded by Goldman Sachs alumni. Founded in 2004 by former Goldman Sachs partners Girish Reddy, Thomas Healey and Gavyn Davies, Prisma is a fund of funds known for identifying specialist hedge fund managers with exceptional track records and creating custom portfolios for clients.

The firm was created when partners signed a joint venture with AEGON USA Investment Management LLC, part of the global insurer AEGON N.V. (AEG).

As of April 1, more than 90% of Prisma's $7.8 billion in assets under management belong to institutional investors, including a portion from AEGON. As part of the transaction, AEGON will sell its minority stake in the firm but remains a significant investor in Prisma's funds. All cash proceeds received by management at closing will be reinvested in Prisma funds.

Prisma, which will continue to operate under its own brand, will become part of KKR's Public Markets segment. Co-founder and Chief Executive Mr. Reddy will run KKR's global hedge fund of funds effort, working with KKR executives around the world to provide broader investment solutions to clients, while co-founders Messrs. Healey and Davies will become senior advisors to KKR.

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