On Monday, a milestone deal for the private equity industry was announced. The acquisition of HCA by a private equity consortium may top KKR's buyout of RJR Nabisco as the largest LBO in history, but it's not the transaction I'm referring to. To much less fanfare, UK asset management firm and Income Investor pick AMVESCAP PLC (NYSE:AVZ) agreed to purchase restructuring specialist WL Ross & Co., in a deal that could ultimately be worth $375 million over the next five years.

The terms of the deal are as follows: AMVESCAP will pay $100 million up front, and five annual earn-out cash payments, each capped at $55 million. Once the acquisition closes, which it expected to happen during the fourth quarter, Wilbur Ross will manage the combined entity of WL Ross ($3.5 billion in assets under management) and AMVESCAP's direct private equity business, INVESCO Private Capital (approximately $1.7 billion in AUM). The acquisition is expected to be immediately accretive to earnings.

WL Ross & Co. has invested in and restructured financially distressed companies in the U.S., Europe, Japan, and Korea. The 6-year-old firm has sponsored $3 billion of private equity investments, predominantly in industrial sectors such coal, textiles, and automotive parts. In 2002, Ross organized International Steel Group, which was merged with Inside Value pick Mittal Steel (NYSE:MT) in 2005. Ross remains a Mittal director.

In a conference call following the announcement, Ross said, "I believe this is a pioneering deal in what will likely be quite a number of similar transactions going forward." Normally, I would put this language down to "deal exuberance," but in this case, I think it's absolutely true. With the rapidly growing demand for alternative investments (hedge funds, private equity, real estate, etc.) from pension funds, endowments and family offices, traditional money managers have been scrambling to get a slice of the pie. The fee structure for alternative investments -- 1-2% of assets and a 20% performance fee -- is clearly compelling compared to traditional investment products.

In 2004, JPMorgan Chase (NYSE:JPM) bought a majority stake in hedge fund company Highbridge Capital Management. Lehman Brothers (NYSE:LEH) owns a 20% stake in GLG Partners, one of Europe's largest hedge fund management firms, and added a 20% stake in another company, Ospraie Management, in 2005. However, AMVESCAP's acquisition is the first one involving a major private equity group, and will be closely watched to see if it delivers synergies that go beyond capital raising. (IPOs are an alternative -- in May, Kohlberg Kravis Roberts, one the largest private equity firms, listed one of its funds on the Amsterdam exchange, raising $5 billion).

This deal looks like a winner for both parties. WL Ross will benefit from AMVESCAP's reach in sourcing deals and raising assets, while AMVESCAP brings on a highly experienced and successful private equity team, and purchases a stream of management fees. One should note that AMVESCAP will not participate in the shared profits of existing WL Ross funds (known as the "carried interest"), and that the size of the earn-out payments for the acquisition are contingent on the size and number of new fund launches.

What are the risks of the transaction? There is no question that WL Ross has done extremely well as a distressed debt investor. However, it remains to be seen whether its management team can operate as skillfully outside its traditional grazing grounds in other areas of private equity, such as venture capital. With their payoff dependant on new fund launches, will they be able to put larger and larger amounts of money to work profitably? (This is an open question for the industry as a whole). AMVESCAP is wagering that this golden-egg-laying goose will survive the transition.

Mittal Steel is an Inside Value pick. AMVESCAP and JPMorgan Chase are Income Investor picks.

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Fool contributor Alex Dumortier has no beneficial interest in any of the other companies mentioned in this article. He welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.