Hedge funds — facing forced margin calls and investment redemptions — are selling off wide swaths of their private equity-type investments in search of cold hard cash.
And private equity firms have been only too happy to scoop them up.
While there was some talk of the sell-off last year and a few transactions, the number of transactions involving both single companies and pools of portfolio companies didn't take off until early this year.
Hedge funds' private equity portfolios are the result of a convergence of private equity and hedge funds that began about three years ago. At that time, hedge funds started participating in private equity deals in a big way. They invested in the debt layers of private equity deals syndicated by banks and also invested directly in companies in private equity deals.
Now, they can no longer afford to own these investments, which have much longer holding periods — three to six years — than typical hedge fund investments, and they are selling them off. Several hedge funds are selling interests in individual companies to co-investors and other syndicate members to pare down their positions. The more troubled hedge fund firms are offloading private equity positions in bulk, industry insiders say.
Nobody knows for sure how much of the nearly $2 trillion hedge funds have under management is invested in private equity and what percentage of that will eventually be put up for sale. Still, a growing number of deals have been coming to market recently.
So far, most of the deals have been on individual portfolio companies, said David Fann, president and chief executive officer at PCG Asset Management LLC, La Jolla, Calif., a private equity consulting and investment management firm.
“When hedge funds try to exit (their private equity investments) in bulk, it signifies a more significant shift in strategy at the hedge fund itself,” Mr. Fann said.
If the capital markets continue to decline, a large number of hedge funds could run into trouble, resulting in more bulk sales, he said.
“As hedge funds melt down, we would expect a more bulk (sale) mentality,” Mr. Fann said.