Goldman Sachs Group Inc. (GS) is seeking money to
bankroll fledgling hedge funds, its second attempt since 2008 to break into a
business now dominated by Blackstone
Group LP (BX), according to three people with knowledge of the plan.
The bank has spent the past year trying to attract clients
for a seeding fund, which provides managers with startup investing capital in
exchange for a cut of their fees, said the people, who asked not to be
identified because the effort is private. Blackstone recently raised $2.4
billion for its second seeding fund, the industry’s biggest.
Reservoir Capital Group, Larch Lane Advisors LLC and
PineBridge Investments LLC also are marketing new funds, saying it’s a good
time to back startups because after the financial crisis investors are
reluctant to trust even talented traders going out on their own. Goldman Sachs,
based in New York, shut a
fund in 2008, underscoring that betting on new managers can be tricky even for
one of Wall Street’s savviest firms.
“Seeding isn’t an easy-money business,” Alexis Graham,
co-founder of Acceleration Capital Group, a New York-based firm that works with
seed investors, said in a telephone interview. “There are only a small
percentage of people out there who can consistently outperform, build a
business and scale assets.”
About half of the 100 or so firms that financed startups
before 2008 have curtailed their investing or quit the industry, Graham said.
Reasons for the shakeout include poor manager selection and hard-to-navigate
Slice of Fees
Seeders generally invest $100 million to $150 million in a
hedge fund, providing a pool of capital to help the manager begin trading. In
return, the seeding fund gets 15 percent to 25 percent of the hedge fund’s
fees. Hedge-fund managers typically charge clients 2 percent of assets and take
20 percent of investment gains.
The seed money is often locked up in the hedge fund for
three years, and seeders return initial capital to their investors after about
five years. Seeding funds retain their ownership stake until it’s bought out by
the manager or a third party.
“If you have a 10-fund portfolio and three funds climb over
$1 billion, then the economics work and you have a winner,” said Eric
Weinstein, who runs the $4 billion fund-of- fund business at Neuberger Berman
Group LLC in New York. Seeders target annual returns of about 12 percent to 15
percent for their investors, he said.
Blackstone, the world’s largest private-equity firm, jumped
into seeding in 2007 with a $1.1 billion fund that took stakes in eight
managers. While one of the hedge funds failed in 2008, the New York-based
company’s portfolio has returned about 50 percent since inception, according to
investors. The remaining firms collectively manage $7 billion, and three have more
than $1 billion, including Senrigan Capital Group Ltd., run by ex- Citadel LLC
trader Nick Taylor in Hong
Goldman Sachs, the fifth-biggest U.S. bank by assets, plans
to seed managers through a new venture between its hedge-fund strategies group,
which allocates money to managers for clients, and its Petershill Fund, which
buys stakes in established money managers, said the people familiar with the
matter. They didn’t disclose how much money Goldman Sachs is seeking for the
effort, which will be led by the firm’s Ali Raissi.
The bank’s seeding effort in 2008 involved financing two
hedge funds, one person said. Ed
Canaday, a spokesman for the bank, declined to comment.