K.K.R. Is Said to Be in Talks to Buy Stake in a Fund of Funds

Kohlberg Kravis Roberts, the private equity giant, is in talks to buy a stake in a money manager that focuses on hedge funds, people briefed on the matter said.

A deal with the money manager, Prisma Capital Partners, which oversees nearly $8 billion in hedge fund investments, would accelerate K.K.R.’s evolution from a buyout shop to a large asset manager. The fund-of-funds business is one where K.K.R.’s chief rival, the Blackstone Group, has been expanding.

The people briefed on the matter, who asked for anonymity because they were not authorized to speak because the talks were private, cautioned that the talks were continuing and might not result in a deal.

Started in 2004, Prisma Capital has attracted attention in recent years for its strong record and management pedigree. The founding members, who are all former Goldman Sachs partners, have deftly navigated an industry that is dealing with weak performance, new regulation and government scrutiny.

By buying a stake in Prisma, K.K.R. would gain expertise in a business that invests in multiple portfolios and tries to capitalize on a variety of strategies. Industry rivals have been aggressively expanding in this business. Blackstone’s fund-of-funds business now manages nearly $40 billion.

Since the financial crisis, assets of funds of funds over all have dwindled. A number of firms have collapsed and others are barely hanging on as big investors choose to invest directly with hedge funds. Increasingly, the industry has diverged into the megafunds like Blackstone and Grosvenor, and the smaller funds that are struggling to raise money.

By taking a piece of Prisma, which has managed to attract assets amid the tumult, K.K.R. is hoping to build out its hedge fund business, part of a broader trend of asset managers’ amassing products to offer. While private equity behemoths have long offered long-term investing options, hedge funds grant clients investment opportunities that are more liquid.

That has become increasingly important as the investor base of hedge funds and private equity firms changes, with institutional investors like pensions and endowments becoming more predominant. Big pensions are often looking to establish relationships with firms that can offer an array of services. The investment firms, too, are eager to cross-sell products.

Private equity has been burned in the past, however. The Carlyle Group hired Afsaneh M. Beschloss, the former chief investment officer for the World Bank, to run a fund-of-funds portfolio for it. The arrangement quickly soured, and Ms. Beschloss spun the business out and formed the Rock Creek Group.

For other acquisitions, the jury is still out. K.K.R. hired an entire team of traders from Goldman Sachs, led by Robert Howard. The group was part of the proprietary trading operation at Goldman, which shed these businesses to be able to comply with the Volcker Rule. But Mr. Howard’s team has not yet shown the sort of stellar performance many expected.

For Prisma, a deal with K.K.R. would give the firm access to a variety of investors, including sovereign wealth funds that tend to invest big chunks of money and are considered marquee investors.

By aligning with K.K.R., Prisma also gains credibility outside of the closeted world of hedge fund investors, granting it a larger platform to market itself.

Prisma was founded by three former Goldman Sachs partners, Girish Reddy, Gavyn Davies and Thomas Healey.

To differentiate themselves, several funds of funds have focused on managers who are less well-known. That has been one of the strategies that has helped Prisma increase its assets as competitors scramble to find hedge fund managers that big investors cannot find on their own.

The strategy could face pressure, however, if Prisma grows too quickly. Putting huge sums of cash to work in the hedge fund arena has often led investors to the largest managers, not necessarily those that are the best performers.