Last month Och-Ziffl became the first hedge fund manager to lead a buy-out when it acquired headhunter Whitehead Mann for 26 million. This is emblematic of a growing trend, according to a survey published by accountants Grant Thornton.
The survey found 46 percent of hedge fund managers thought about moving into private equity and 6 percent have already started the process. It also showed hedge funds regularly buy debt from portfolio companies of private equity firms.
“The most common area of convergence has been on the debt side,” says Joseph Massoud, managing partner at US private equity firm Compass Group Management. “Hedge funds are competent evaluators of credit and they compete effectively for debt.”
“The collateralised debt market is driven by hedge funds setting up loan management vehicles,” says Rob Long, managing director of Allied Capital. “Banks make up only 20 percent of the loan market with 80 percent coming from structured vehicles.”
The shift of the hedge fund industry into private equity compromises investment in public equity and is threatening investment returns, the survey reported. “Valuations of companies have increased substantially as a multiple of earnings before interest, tax, depreciation and amortisation,” it says.
The survey said this latest trend is an attempt by hedge funds to meet investor expectations at a time when the increase in allocations to hedge funds is depressing returns in their traditional domains.
Private equity specialists say hedge fund managers are surprised by the degree of “hand holding” necessary in private equity by comparison with trading securities. There are also concerns about “style drift” with hedge funds moving into private equity.
The survey highlighted fund maturity problems, saying that although hedge fund managers have extended their lock-in periods from three months to three or even five years, it does not decrease the risk of redemptions.