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Private equity groups and others are increasingly turning to hedge funds as they seek to capitalise on the maturing industry’s rich fees and growth.

Credit Suisse is restarting a business that buys minority stakes in hedge fund management businesses, and Goldman Sachs is near to closing its second fund to do the same, both in private equity-style vehicles.

They are joining the likes of Blackstone, Affiliated Managers Group and Dyal Capital Partners at Neuberger Berman, some of which have been buying such stakes for a decade, and are up against strategic buyers from the private equity industry including KKR and Carlyle, which buy stakes or entire funds outright.

The firms are not investing in individual hedge funds, but sharing in the fees they charge clients — less than the traditional average fee of 2 per cent of assets plus a 20 per cent cut of profits, but still typically more than 1 per cent of assets and 15 per cent of profits.

After Marshall Wace sold a 24.9 per cent stake to KKR in September, Ian Wace, co-founder and chief executive, said the $22bn London hedge fund group had been contacted by several companies seeking an investment in recent years.

Motivations for hedge fund managers to sell include the obvious — monetisation — as well as the benefit of a formal industry stamp of approval and the chance to use the buyer’s resources to help them grow, according to Sean Healey, whose AMG this month bought BlueCrest’s stake in Leda Braga’s Systematica hedge fund.

Selling a slice also sets a valuation, which helps motivate employees, and locks in more permanent capital amid threats of client redemptions and further fee pressure.

Mr Healey says he looks for firms that “want to create an even more successful and enduring business franchise, and one that lives and prospers” beyond its founder’s lifespan. As the industry’s pioneers near retirement age, trading some profitability for a stable partner is often referred to as “succession capital”.

24.9%Stake sold by Marshall Wace to KKR in September

Goldman Sachs is $100m away from closing its Petershill II fund at $1.4bn. It has used the fund to buy stakes in the $8bn fund Caxton Associates, credit hedge fund Knighthead, and equity long-short fund Pelham.

Petershill I, started in 2007, had annualised cash yields in the mid teens, with mixed investment records: stakes in London-based Winton Capital and Capula did well. Other bets went sour: Level Global Advisors became entangled in an insider trading investigation and shut down, and Shumway Capital Partners returned outside capital.

Goldman almost sold Petershill in 2012 to Asset Management Finance, a firm majority owned by Credit Suisse. AMF stopped making new investments that year but Credit Suisse is now ramping it up again: this year it hired John Powers from Stanford University’s endowment to head a business with a similar mandate but using outside money.

Private equity firms and others have an opportunity as banks have pulled back from buying stakes, curbed by post-crisis regulation and capital rules, and the bar is high for hedge funds to list publicly, Mr Powers says.

More deals are happening at medium-size firms as they have lower valuations and more growth potential, according to Adam Taback, head of alternative investments at Wells Fargo. “The biggest risk is the valuation,” he says.

Additional reporting by Miles Johnson in London

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