U.S. private equity behemoth Carlyle Group LP is buying a Toronto-based asset manager that specializes in picking hedge funds for huge institutional investors, yet another sign of Canada's growing influence in the business of running alternative assets.
Carlyle said Tuesday that it has agreed to buy Diversified Global Asset Management Corp., an employee owned firm that oversees assets of $6.7-billion (U.S.), for about $103-million. About a third of that will be paid up front, with the rest spread out over subsequent years.
DGAM's specialty is advising large investors such as pension funds and sovereign wealth funds on how to use hedge fund strategies to manage risk and increase returns.
Canada, particularly Toronto, has a reputation as a top centre for money management in pension circles, with institutions such as Ontario Teachers' Pension Plan and Canada Pension Plan Investment Board running complex strategies using alternative investments – essentially, in-house hedge funds. DGAM helps clients do the same thing by building custom portfolios of hedge funds and investments.
DGAM's team will remain in Toronto, becoming shareholders of Carlyle, and will become the basis of Carlyle's new fund-of-hedge funds business.
"Post-crisis, all the growth in our space has been from institutions tyring to emulate the thinking of people like Ontario Teachers and the CPP," said DGAM co-founder and chief executive officer George Main.
"We've built a business that helps big institutions solve problems using hedge funds," Mr. Main added.
Carlyle now has roughly a quarter of its almost $200-billion of assets in what it calls its solutions business, helping clients design portfolios and choose investments. It also has funds of real estate funds and funds of private equity funds in that group, said Jacques Chappuis, who runs the solutions business for Carlyle.
"In the investment world today, if you are chief investment officer of a pension plan or sovereign wealth fund, or a high net worth investor, the world is just so complex. There are so many options, and if you [have] a large pool of capital, it gets even worse," Mr. Chappuis said. "Choosing [among] these things becomes incredibly complex."
DGAM now will have access to Carlyle's client base, and should be able to ramp up its growth in Toronto.
"Through this transaction we get to maintain our autonomy, our independence," said Sa'ad Shah, the DGAM managing director in charge of marketing. "The Toronto team is going to be growing."
DGAM has been growing and profitable in a tough business. The hedge fund of funds sector has had its struggles, with many companies delivering subpar returns. DGAM had to overcome the perception of the sector, as well as concerns from the largest investors that DGAM is on the small side. Some investors prefer to deal with larger firms, believing that they are more stable. Others just want the name recognition of dealing with a well-known brand. The alliance with Carlyle should put that to rest.
"We had to find a global partner to stay in Toronto and build a Toronto-based business, taking it to the world," said Mr. Main. "We're now using the leverage that comes from this global brand and distribution to export what we're doing in Toronto globally."