BlackRock: Buys Quellos Fund of Funds (BLK)

If you are a hedge fund manager that is classified as a fund of funds operation, you are probably crunching some numbers to see what you think your operations are worth.  BlackRock, Inc. (BLK-NYSE) has announced that it is acquiring the fund of funds purchase from Quellos Group, LLC for up to $1.7 Billion.  BlackRock claims the combined fund of funds business will have $25.4 Billion under management within its hedge funds, private equity, and real asset fund of fund structures.

Quellos Group, LLC will receive $562 million in cash and $188 million in BlackRock common stock at the closing and may receive up to an additional $970 million in cash and stock over three and a half years contingent on certain measures (performance and retained assets, likely). A substantial portion of after-tax cash proceeds will be reinvested for ten years in products managed by the fund of funds investment professionals.

Will Quellos change or be the same?  Jeffrey Greenstein, CEO of Quellos has announced his intention to retire concurrent with the closing. He has agreed to serve as an advisor to BlackRock to assist in the transition. Bryan White, Quellos’ Chief Investment Officer, will serve as global head of the combined fund of funds platform, which will be branded under the name BlackRock Alternative Advisors. There are no changes expected to the investment strategy or style of existing offerings, each of which will continue to be managed by members of their existing portfolio management teams.

Blackrock is not acquiring assets that have been tied to a number of tax-related lawsuits.  The fund of funds business has been a lucrative operation because the managers get the fee and they also get to share in the performance fees in many (not all) of the ‘alpha’ returns above a benchmark.  This also gives investors a less risky investment profile because it diversifies strategies within a more aggressive structure.

Jon C. Ogg
June 26, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.