Salient Partners is buying Forward Management in an effort to build scale in the rapidly growing liquid alternatives space.
The deal, announced Wednesday and scheduled to close by July, creates a $27 billion asset management firm, including 36 mutual funds, separate accounts, and at least one hedge fund.
Terms of the transaction were not disclosed.
Even though Houston-based Salient, with $21 billion under management, is the acquiring firm, Salient president Jeremy Radcliffe referred to Forward as the “more mature platform” in terms of liquid alternative strategies. Of the firm's total assets, less than $2 billion in represented by six mutual funds. The rest is in separate accounts and private funds.
San Francisco-based Forward has 30 mutual funds totaling $4.5 billion under management.
“This is the transformative transaction that gets us to scale,” said Mr. Radcliffe. “From here, we'll certainly look at other potential deals that come up and are philosophically aligned with us, but we don't anticipate doing another deal like this one.”
Part of the scale-building process will involve tapping into what will be a combined internal and external distribution force of about 50 people, according to Mr. Radcliffe.
Even though the multi-year strength of the equity markets has not favored liquid alternative strategies that are often designed to buffer and navigate downside volatility, the liquid alts space has experienced explosive growth, totaling more than $188 billion in 550 mutual funds.
This is the bandwagon that the Salient-Forward deal hopes to join, and even lead.
“As far as liquid alts go, we have seen it blossom, and it's really about scale in the fund industry because it has become a very competitive space,” said Alan Reid, chief executive of Forward.
Mr. Radcliffe went a step further, claiming that “this transaction puts us in a leadership position in the liquid alts space.”
“We have a pretty complete set of strategies and funds, and we're very excited about what this company looks like together,” he added. “We also have room for some institutional growth with some of the Forward strategies.”
Bradley Alford, chief investment officer of Alpha Capital Management, said he isn't surprised to see some consolidation in the liquid alts space as firms try and compete with larger mutual fund complexes.
“Forward is one of the pioneers in the liquid alts space, but you clearly need to be bigger to build your brand name,” he said. “I bet you will see a lot more of these kinds of deals as liquid alternatives continue to evolve.”
In terms of that evolution, Morningstar Inc. analyst Jason Kephart pointed out that Forward was an early entrant into the business with its Forward Tactical Growth Advisor Fund (FTGMX), which was converted from a hedge fund during the financial crisis and moved into cash to avoid much of the carnage.
But after growing to more than $1 billion, the fund has seen its assets drop to below $800 million. The long-short equity fund is down 1% from the start of the year after gaining 2.3% last year.
By comparison, the Morningstar long-short category average has gained 0.2% this year and 2.9% last year. The S&P 500 Index is up 0.7% this year and climbed 13.7% last year.
“That (Forward long-short) fund was early into the liquid alts space, but it has since faded,” Mr. Kephart said.
Mr. Reid of Forward admits the modern definition of alternative is far and wide, a point that Mr. Kephart seemed to agree with as Morningstar includes the $1.9 billion Forward Select Income Fund (FFSLX) in the liquid alts camp.
The $1.9 billion preferred stock fund is a shining example of Forward's portfolio management capabilities.
The five star-rated fund is up 2.3% this year and gained 16.8% last year, compared with the preferred stock fund category average gain of 1.5% this year and 5.3% last year.
Salient's biggest fund is the $1.5 billion Salient MLP & Energy Infrastructure Fund (SMAPX), which is down 0.8% this year after rising 8.4% last year.
The energy infrastructure fund category average is also down 0.8% this year and gained 7.9% last year.