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Consolidation of FoF sector continues with Capital Dynamics acquisition of Westport

The gradual consolidation of the private equity fund of funds sector has moved forward another step with the takeover of UK-based firm Westport by the US and Swiss-based firm Capital Dynamics. CD's acquisition of the business from hedge fund manager the Man Group will turn it into one of the largest fund of funds managers in the world with more than $5bn of global commitments.

Thomas Kubr, the chief executive of Capital Dynamics, said the deal represented a sympathetic marriage of his firm's financial sophistication and broadly spread client base with Westport's UK strengths and fund investment experience. The combination would position the new organisation to thrive in the ever more challenging marketplace.

'As the private equity asset class becomes more institutionalised, client needs have and will continue to become more sophisticated. By integrating Westport into our established asset management business, Capital Dynamics can offer global scale with deep local access and will blend a proven investment process with an innovative solution-driven approach,' he said.

Capital Dynamics first approached Westport's parent Man about a possible takeover in the summer and the deal was finally completed on Dec 28. No financial details have been disclosed about the transaction. Man recently revealed that it wanted to pull out of the private equity business, having failed to match the success in the asset class of its hedge funds business.

The new firm will continue to offer the traditional fund of funds products to investors, such as limited partnership funds that enable smaller institutions to get adequately diversified exposure to the asset class. But it will also be well positioned to offer tailored products to larger and more sophisticated investors.

Capital Dynamics has a strong global reputation for structured products and innovative investment solutions. It was among the first firms in the world to develop a fund of funds structured as a CDO when it launched Prime Edge in 2001. Then in 2002 it worked with AIG to structure Pine Street I, a $1bn securitisation of 64 private equity funds held by the US insurer.

Westport was founded in 1988 and now manages around $2.5bn of assets for UK and European institutions. Its clients include Greater Manchester Pension Fund, the Bank of England, Caisse des Depots and the European Investment Fund. Westport's CEO John McCrory will step down on completion of the deal. The UK team will be led by fellow founding investment professionals John Gripton, Angela Willetts and Mark Drugan.

Mounting competition and the growing sophistication of the investor base have been driving a slow consolidation across the fund of funds sector in recent years. Some of the smaller firms founded during the late 1990s have been gradually disappearing after failing to raise new funds, while a handful of larger firms have joined forces.

US asset management firm Frank Russell took over private equity fund of funds specialist Pantheon in late 2003. US investment bank Lehman Brothers bought the Crossroads Group. And German firm CAM Private Equity took over the private equity activities of bank Sal Oppenheim. The trend is expected to continue in the coming years, with the smaller groups struggling to match the economics or the services provided by the larger specialists.

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