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Exclusive: Apollo seeks to exit fund manager Lighthouse - sources

Apollo Management LP Managing Partner Leon Black speaks at the panel discussion "Global Opportunities in Private Equity" at The Milken Insti
Apollo Management LP Managing Partner Leon Black speaks at the panel discussion "Global Opportunities in Private Equity" at The Milken Insti

By Jessica Toonkel and Greg Roumeliotis

(Reuters) - Apollo Global Management LLC is looking to cash out on its investment in the owner of Lighthouse Investment Partners LLC, three years it after it backed the fund-of-hedge-funds manager, according to people familiar with the matter.

Apollo's Lighthouse investment added a new product line to its offerings. Disagreements over strategy and disappointment with Lighthouse's performance, however, have prompted the alternative asset manager to pursue an exit, the people said this week.

As a result, Australian asset manager HFA Holdings Ltd , which owns Lighthouse and received the investment from Apollo, has asked investment banking boutique Freeman & Co to explore a variety of options, including an outright sale of Lighthouse, the people said.

The sources asked not to be identified because the matter is confidential. Apollo declined to comment while representatives of Lighthouse, HFA and Freeman & Co did not immediately respond to requests for comment.

When Apollo announced its alliance with Lighthouse in December 2010, Apollo Chief Executive Leon Black said he was extremely impressed with Lighthouse's management team and its business model, which he described as "highly complementary."

Since then, Lighthouse has struggled to increase its revenue and has cut investment management costs to boost its bottom line. Shares in HFA, which derives around 90 percent of its net operating income from Lighthouse, have been relatively flat in the three years since Apollo's investment.

The shares ended trading in Sydney on Wednesday at 77.5 Australian cents, giving HFA a market value of A$92 million.

As part of the deal, Apollo and a co-investor, the South Carolina Retirement System, received $75 million in HFA notes convertible at 97.66 U.S. cents ($A1.1) per share and initially equivalent to a 39.6 percent stake in HFA, according to a 2011 regulatory filing.

They also received 31.25 million share options with an exercise price of A$8 per share.

The deal called for Apollo to distribute the investment products and services of Lighthouse through its global distribution network.

Lighthouse therefore not only supplemented Apollo's private equity, credit and real estate offerings, but it also allowed it to compete with fund-of-hedge-funds units of competitors, including Blackstone Group LP's BAAM and KKR & Co LP's Prisma.

Carlyle Group LP entered the fund-of-hedge-funds space just two months ago, announcing an agreement to buy Diversified Global Asset Management Corporation.

HFA had close to $8 billion in assets under management as of the end of September, with just over $7 billion of that managed by Lighthouse, which is based in Palm Beach Gardens, Florida, and the remainder managed by Certitude Global Investments, an Australian multi-asset investment manager.

HFA was set up in 1998 as a provider of absolute return fund products to retail investors in Australia and was listed on the Australian stock exchange in 2006. In 2008, it acquired much larger asset manager Lighthouse for $674.5 million. Certitude is HFA's heritage Australian fund business.

Lighthouse specializes in offering investors bespoke managed accounts that assemble individual hedge fund portfolios. It also offers funds which attract money from more than one investor.

Apollo's assets under management have more than doubled since it invested in HFA. It managed $112.7 billion as of the end of September, including $59.4 billion in credit, $42.8 billion in private equity, and $9.3 billion in real estate.

(Reporting by Jessica Toonkel and Greg Roumeliotis in New York; Editing by Richard Chang)

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