With the collapse of the present day Investment Bank model, PrivateEquityJobs.com forecasts the creation of a new alternative investment vehicle which we believe will become the standard for Investment Management. The migration of talent to Private Equity and Hedge Fund from the Investment Banks will cause numerous transformations in the alternative space including a rapid ascent of the larger firms. This will enable the larger firms to evolve into more dominate multi-strategy funds.  This transformation has already begun, but with the Investment Bank Business Models changes that took place on Monday, September 22nd 2008, this transformation has a greater potential of increasing in speed and depth.

The Mega Fund

There is now a ripe opportunity for the large firms to become “one stop” shops for all of their clients’ alternative investment management needs. In order for this change to occur, the larger firms need to grow bigger and more stable in the process. The largest of these funds will become $100 billion if not $300-400 billion plus multi-strategy Mega-funds offering a wide range of products, including everything under the “alternative” label as well as trading and financing strategies which have traditionally fallen to the Investment Banks.  These new Mega firms will offer their clients access to numerous strategies with well defined infrastructures in place which can support the firm and its assets.

These funds’ infrastructures will eliminate some of the business operational risk which many funds have had in the recent past and which has caused the implosion of more than a few funds.  These large funds will generate alpha with a few of their products, but the majority of their products will mostly likely consist of more stable strategies thus eliminating some of the investment risk from the firm’s overall portfolio.

Adaptation of the Smaller Funds

This is not to say that smaller Private Equity and Hedge Fund firms will no longer exist. The smaller, more nimble funds will play an increasingly important role as “Alpha” generators for their clients.  These funds will provide a market for many smaller and middle size companies which will be less serviced by some investors now that the investment banking model has changed.   Smaller funds will have less direct competition from the Mega-funds because the smaller fund’s deal size will be too small, relatively to make a difference to the larger funds. The Mega-funds will be able to receive and use leverage while many of the smaller funds will use very little leverage, if any at all. The lack of dependence on leverage helps the smaller firms get more deals completed in any investing environment.

Whether you want to calls these new large funds, Mega Funds or Diversified Financial Services Holding Companies, many will partake in numerous strategies including, real estate, private equity, long/short, statistical arbitrage, venture funding, timber, short term financing, and fixed income arbitrage to name a few.  These funds will fill the voids that have been created with the changes to the Investment Banking model, specifically in areas such as proprietary trading, lending, and principal investing which will be dissolved by regulations and have very few large players outside of these Investment Banks.  I do not see these firms creating large wealth management teams or asset gathering networks but rather servicing their clients and marketing their funds in a fashion very similar to today’s business model.  These Mega funds will stay as product producing firms which can leverage off of their size and product breadth to service the marketplace.

For those individuals who felt that the alternative investment management space was still in its infancy these changes should make the industry grow up very quickly.  The challenge will be to make sure this growth is well managed and the individuals who have invested in these funds do not suffer negative effects.  If this were to happen we risk having the Private Equity and Hedge Fund industries become more regulated and most likely less profitable for those professionals working in the space.