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Secondary Hedge Fund Market

admin — Mon, 28 Sep 2009 18:21:00 +0000

Secondary Hedge Fund Market

Secondary Hedge Fund Market Activity Increases

The secondary hedge fund market has grown while other areas of the hedge fund industry have contracted during the financial crisis. The secondary hedge fund market gives investors the opportunity to sell stakes in funds with long lockup periods or limits for redemptions as well as providing access to funds not currently accepting new investors. The increase in secondary market activity is a result of managers trying to keep investors with long lock up periods and limiting redemptions. Investors responded by turning to the secondary market to sell their stakes, usually at a heavy loss.

Hedgebay, a leading secondary market player that’s been in the business for a decade, helped investors buy and sell stakes representing roughly $1 billion in assets under management last year. The firm has completed more deals so far in 2009 than in all of last year.

Citco, a large banking and custody firm, has offered similar services for many years, while Swiss bank Credit Suisse (CS) and NYPPEX are also active in the market. But a slew of new rivals have entered this year, including CogentMarkets, SecondMarket, 2n20.com and the largest interdealer brokers ICAP and Tullett Prebon PLC (TLPR.LN).

So many firms have got into the nascent business that there may not be enough action for everyone to survive. “A lot of players will show up when there’s money to be made,” said Bradley Alford, head of Atlanta-based Alpha Capital Management LLC. “There are all kinds of secondary hedge fund players now and not enough supply out there.” Source

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Private Equity Golden Age

admin — Wed, 23 Sep 2009 17:10:00 +0000

Private Equity Golden Age

Silver Lake CEO Predicts Private Equity “Golden Age”

The CEO of Silver Lake, a large private equity firm focused primarily in technology and growth industries, has a rosy prediction for the near future of private equity. Silver Lake CEO and co-founder, Glenn Hutchins, forecasts “The financial markets may be on the cusp of a new ‘golden age’ for private equity.”

The financial crisis which has brought ruin to many private equity firms and their portfolio companies may now be ending as credit markets open up and the stock markets recover. Hutchins points out some important and promising indicators but he does not provide a clear explanation for why it will be a “golden age” rather than simply a return to average private equity activity. After all, even a very modest recovery in the industry will be seen as a significant improvement but it would still fall short of the boom a few years back.

“Now that the sort of panic of ’08 is over and capital markets seem to be returning to some degree of normality … companies will be able to access debt and equity markets like they have in the past. And that is no surprise,” Hutchins said.

But he added that investors needed to be mindful that valuations in 2007 should not be defined as normal. They were an “overshoot in another way,” he said.

“Now risk premiums are at attractive levels. Investors are being paid to take risk again. That means when you look back on this, when you get back to economic recovery, this will have been a good time to invest,” Hutchins said.

“If you need financial engineering to enter a deal and multiple expansion to exit a deal, then your business is fundamentally challenged,” Hutchins said. Source

Read more about Silver Lake at our Private Equity Tracker profile.

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Private Equity Industry 2009

admin — Thu, 10 Sep 2009 14:35:00 +0000

Private Equity Industry 2009

Thoughts on 2009′s “New Normal” in Private Equity

It seems everyone is trying to anticipate changes to the private equity industry and how it will effect individual firms and investors. Whether it is the FDIC allowing private equity firms to invest in banks, states outlawing the use of placement agents, a boost in the IPO market or a recovering public market; there are major changes taking place following the major financial crisis. Some of these changes may be permanent while others will likely be temporary and adapt as the economy recovers.

Australian private equity blog Carried Interest recently looked at what the long-lasting fundamental shifts will be, those that last at least 3-5 years. I was writing a comment on his predictions but it evolved into a small essay so I’ve included it here. He believes that the “New Private Equity Normal” will include the following factors–to which I added my two cents:

Fewer firms: Carried Interest estimates a 30-50% reduction in the number of private equity firms in the next few years. I find this a bit high, if nothing else simply based on the volume of e-mails I receive from individuals and firms looking to open a private equity firm. Whenever a financial industry has a tough year observers speculate that a huge portion of the industry will dissolve. For example many observers were writing the epitaph for the hedge fund industry at the end of last year but August marked the sixth straight month of positive returns and hedge funds are posed to have the best year in a decade. I hesitate to suggest that private equity is about to have such a massive and rapid recovery.

But there is enough monetary incentive remaining as the 2/20 model has not been drastically reduced and investors are returning slowly. In 2009 fundraising was off to a dismal start in Q1 but increased 28% in Q2. It’s to be expected that fundraising would be incredibly tough but as confidence returns to the market I don’t see much warranting a cut in the industry by half.

As for existing portfolio companies, these firms should do better as the economy recovers and consumption increases (unless it’s a double-dip recession as Nouriel Roubini suggests). If the capital many private equity firms have had to inject does not overburden them with debt and if portfolio companies are able to generate profits again, then most firms may be able to escape bankruptcy. Of course, it’s tough to estimate anything in this economy but most economists have agreed that the worst is behind us in the financial markets at least. A recovery in the IPO market also suggests that private equity activity will recover in the next year as more buyouts take their companies public and find new investments. I think it might be healthy for the industry if it consolidates a bit but a reduction by 30-50% is quite severe and, I think, unlikely.

Much less debt: I do agree with Carried Interest on the reduction of debt, but maybe not to the 50/50 debt to equity ratio as a standard. It’s hard to imagine that big buyout firms will limit their debt use without a strong push from investors but maybe they are realizing that the potential risk and the concern to investors warrants a shift.

Tougher fund terms: This is an almost certain reality and I believe the terms that limited partners are able to push through will remain the standard unless private equity firms are able to have an amazing year that demands reevaluating their agreements. Again the 2/20 model will largely stay intact it seems although some firms have reduced their fees to entice wary investors especially at new private equity firms. However limited partners are gaining ground in other areas such as distribution waterfall, greater influence on the investments through advisory boards, and other aspects of the LPA. I tend to see term agreements as a tug of war and as institutional investors succeeded in gaining ground it takes twice the effort for private equity firms to recover that loss especially without a really great year.

Longer hold periods: Considering the losses that private equity firm’s portfolio companies racked up in the recession, it’s reasonable that PE backers will want to hold onto these investments longer in order to realize their full value. There was a time this decade where buyouts departed from investing long-term, but that may be over.

Continued development of GP operating skills: Private equity has been evolving its methods and strategies consistently over the last two decades and the pressure to keep increasing returns will ensure that General Partners continue to develop and implement new techniques and ways to increase profits. As Carried Interest writes, “Leverage and multiple expansion are no longer available to drive easy returns. GPs are going to have to build value through earnings growth . . . and that means (really) helping improve portfolio company performance. McKinsey predicted this trend years ago, but the credit boom and strong equity markets allowed many PE managers to cheat, to rely purely on financial engineering. The future? Look at firms like KKR. They have a team of 40 consultants called Capstone whose sole focus is on building value within the KKR portfolio.“

As always, this is not financial advice nor is it a guaranteed prediction of the private equity industry. Please see a qualified legal or financial consultant before following any prescriptions in this website.

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HSBC Hedge Fund Losses

admin — Wed, 02 Sep 2009 15:09:00 +0000

HSBC Hedge Fund Losses

HSBC Alternative Investments Takes Biggest Losses

The hedge fund industry suffered heavy losses during the recession, unfortunately making the “biggest loser” a more competitive category than years past. HSBC Alternative Investments took the worst hit in terms of outflow.

The fund of hedge funds business failed to retain investors and lost 4.2 billion Swiss francs (almost $4 billion) in the first six months of this year. Since HSBC Alternative Investments hit its peak last September, its assets under management has fallen a staggering 52% from a combination of redemptions and losses on investments. The fund of hedge funds industry has been one of the hardest hit during the recession.

The Geneva-based fund of hedge funds business of HSBC reported the single-largest outflow, in absolute terms. Investors yanked 4.2 billion Swiss francs from the private bank in the first six months of the year, the Financial Times reports. That, combined with huge investment losses, leaves the firm’s fund of funds business with just US$22.27 billion, 52% less than it managed at its peak last September, when it boasted US$46.28 billion.

HSBC AI blamed its decision not to chase market share or deposits by increasing rates and lowering margins for the continued first-half redemptions, according to the FT. But CEO Alexandre Zeller said high-net worth clients are again finding a taste for risk and are looking to return to the market. Source

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Venture Capital Future

admin — Thu, 27 Aug 2009 00:51:00 +0000

The Future of Venture Capital

Considering the Future of Venture Capital

Venture capital has been struggling in the recession to secure funding from investors and risk-wary institutional investors are expected to further reduce asset allocation to the sector. In the first quarter of 2009 funding for start-ups plummeted about 50% from a year before to just $3.2 billion. While funding from VC’s has increased somewhat in the second quarter, the number of deals remains about the same and fundraising is dismal, leading many to wonder about the future of venture capital.

I have been reading a lot of predictions of the future of venture capital and most–if not all–are pessimistic. The most optimistic pessimistic piece (forgive the contradiction) I have seen is from Union Square Ventures’ Fred Wilson, he recently wrote:

“We need to get the venture capital business back to raising and investing less than $20bn per year on a sustainable basis. We are there now in terms of dollars being invested in startups. The last quarterly numbers were sub $4bn. And the amount of money coming into the VC business this year will be even less than what is going out.

The diet has begun. We are getting healthy again. I can see it in the market and I believe we will see it in the returns soon enough.”

But even he admits that a trimming of the fat from the venture capital industry probably won’t be a bad thing and even healthy for the bloated industry. In my own following of the industry I have come to a similar conclusion and tend to stray from the panicking VC’s who are calling for a federal bailout. It’s hard to imagine the industry expanding past the size it currently is and with many investors cutting investments in venture capital, many observers expect a major contraction.

A helpful explanation of the industry comes from Benchmark Capital’s Bill Gurley. He estimates that the venture capital industry could be cut to half as investors roll back their capital allocations to alternative assets. His analysis focuses on the problem of institutional investors allocating too much of their portfolio to illiquid alternative assets. Institutional investment managers began increasing investments in alternative assets such as leveraged buyouts (LBO’s), hedge funds and venture capital because these investments tend to produce a larger return with the higher risk.

The “Yale model” of investing heavily in alternative assets produced noticeable returns which was even more visible because institutional investors like pension funds and endowments usually disclose more information to the public. Other institutional investors felt a pressure to keep up with rival managers that were garnering such big gains on their investments so a trend started toward higher asset allocation to alternative assets.

This strategy was well-received during the buyout boom for private equity investments, recent high-earning years for hedge funds, before the real estate market went bust and in the late 90′s til the dot-com crash and middle of this decade for venture capital. Even now, in some cases it is unclear how hard institutional investors will be hit with losses on investments because their money is tied in illiquid assets, many of which are not required to regularly report on a fund’s performance. But allocation to alternative assets has seen immense growth largely spurred by institutional investors who have come to rely on alternative investments to boost portfolio returns.

When the economy tanked and liquid assets like bonds and stocks plummeted institutional investors were stuck with a sinking liquid portion of their portfolio and an uncertain illiquid portion. The managers wanted to stave off any further losses but because they are committed long-term to hedge funds, buyout and venture capital funds it is not as easy to exit. Coincidentally, the long-term aspect of these investments is a reason in favor of keeping reasonable allocation to alternative assets which may recover from recent losses. Furthermore, they were still required to meet capital commitments from their investments which led to a few unattractive options facing institutional investors (Via AboveTheCrowd):

Sell more of it’s liquid securities. This is problematic because it further compromises the target asset allocation.

Try to sell the LBO commitments on the secondary market. As you might suspect the secondary market is extremely depressed. Some have even suggested that due to the forward cash need on an early LBO fund, an institution might have to “pay” to get out of the position, and to encourage someone else take on the future cash commitment.

Default on the commitment. While this does have penalties in most cases, it would not be out of the realm of possibilities for this to occur if the investor has lost faith in the manager, and it is early in the fund (with more cash needs in the future).

Try to raise more capital. Not surprisingly, donations to foundations and universities are down dramatically due to the overall decline in the capital markets. This makes this strategy unlikely.

No matter what option the manager decides to go with, he or his Board are probably going to have a smaller appetite for risk after suffering such heavy losses. Thus, institutional investors and even other accredited investors are likely to cut back allocation to alternative assets in a big way. This is the primary reason that Bill Gurley and others suspect that the industry will be rolled back to a much smaller size.

Another note is just how bloated the industry has become with inexperienced and/or inept VC’s sprouting up trying to raise capital in a tough economy, not to mention the number of proven VCs that have already admitted to problems raising capital and the ones that will undoubtedly struggle in the near future. But I don’t think that any serious predictions see the industry dissolving completely, there are still a lot of talented venture capitalists and brilliant entrepreneurs that will thrive in a bad market or a good one. Even in the midst of a major economic collapse venture capitalists invested $3.7 billion for 612 deals in the Q2 of 2009 according to data from the NVCA. That’s a 15% increase in dollars (although deals are still low) which is nothing to sneeze at in a time when many investors are still skeptical of even traditional investments.

Also see, Venture Capital Media
Learn more about Venture Capital Fund Raising
Read Buyout Funds and Venture Capital

Usual disclaimer applies: This does not constitute financial advice, see a licensed professional or legal consultant before following any recommendations from this website.

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Tags: venture capital industry, future of venture capital, venture capital future, what is venture capital, venture capital recession, data, nvca, industry news, venture capitalists, economy, funding, institutional investors

Leon Black Apollo

admin — Thu, 20 Aug 2009 21:08:00 +0000

Leon Black Apollo

Back in Black: Apollo Management Returns

Leon Black is back. Black, seen here in an unflattering depiction from the Post, founded Apollo Management LP nearly two decades ago. In recent years, the buyout firm has gone through some hard times. After a string of setbacks in the recession, Black’s Apollo Management is becoming a major player in the distressed investing market.

The firm was hit hard by the recession, most notably the lost of its 99.59% equity stake in Linens Holding Co. (parent of Linens ‘n Things.) Apollo purchased the company for $1.3 billion in 2006 but Black failed to save the business from filing for Chapter 11 in 2008. In another deal-gone-bad, Apollo had to go to court against a chemical company it had attempted to purchase. Apollo tried to back out of the $6.5 billion deal to buy Huntsman. The court ruled against Apollo and its portfolio firm saying Hexion intentionally breached the merger agreement; Apollo paid $1 billion in a settlement with Huntsman.

Now, Apollo Management is becoming very active purchasing junior distressed debt. Before moving into private equity, Leon Black was an executive at the investment bank Drexel Burnham Lambert. There he profited by repossessing companies that had fallen into bankruptcy. It seems he has “returned to his roots” by buying up debt of struggling companies trying to stay afloat in the recession.

In a debt-for-equity swap, Apollo Global Management became one of the primary shareholders of Monier Group GmbH, a German roofing business.
It looks like this model will be repeated with decorative laminate maker Panolam Industries International. Panolam recently said it had worked out a preliminary agreement with the holders of senior subordinated notes. The agreement is led by Apollo and would cut $151 million in debt.
Apollo is also rumored to be buying up debt of Fontainebleau Las Vegas Holdings but a larger stake is still in the works.
Apollo Management VI LP has proposed investing $193 million into plastic maker Pliant in exchange for a common equity stake in the company. In the restructuring deal it has successfully pushed through, Apollo or portfolio company Berry Plastics would gain a 55.7% stake in Pliant.

The purchasing of companies with huge debt obligations has earned corporate raiders like Leon Black a great deal of criticism. But the vultures of Apollo have proven the strategy time-and-again so even having his head placed on a vulture’s body won’t likely stop Leon Black. But the question has been placed many times, is Black taking advantage or simply seizing a good opportunity?

See our private equity tracker profile for Apollo Management here.

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Investor Letter | Letters to Investors Updated

admin — Thu, 06 Nov 2008 14:09:00 +0000

Investor Letter

Investor Letter | Letters to Investors Updated

Just a quick note to let you know that we have update our collection of hedge fund investor letter files here: Letters to Hedge Fund Investors

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Top Hedge Fund Resources

admin — Tue, 09 Sep 2008 20:54:00 +0000

Hedge Fund Resources

Top 10 HedgeFundBlogger.com Resources

If you are new to the blog and trying to figure out whether it is worth your time to poke around a little further here are some of the most popular resources provided here which keep some people coming back.

Top 10 resources & tools offered through HedgeFundBlogger.com

– Richard

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Due Dilligence Process

admin — Wed, 13 Aug 2008 07:13:00 +0000

Due Diligence Process

Due Diligence Process Tips by Experts

A panel of hedge fund industry experts gathered at Bloomberg to discuss hedge fund due diligence and educate hedge fund investors on lesser-known difficulties. The discussion emphasizes that there is inherent risk involved in hedge funds, but due diligence can minimize this risk. Barry A. Wintner (director of research at Asset Alliance) says that investors must understand the volatility and danger to avoid worst-case scenarios.

Wintner advocates for choosing seasoned hedge fund managers and thoroughly examining the manager’s past strategies and experiences. He lists important questions to ask when considering a hedge fund manager. The panel discusses operations due diligence, an area that many investors neglect but are critical for hedge fund investors. Another aspect discussed is a thorough method of conducting a background check.

This resource outlines often overlooked due diligence aspects and gives simple tips to correct this. Click here now to view this resource.

- Richard

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Market Profits

admin — Sat, 09 Aug 2008 08:56:00 +0000

Market Profits

Hedge Funds Pull Down Record Profits

Here is a short video describing how 2007 helped create more wealth for individuals within the financial sector than any other year in history. The average market profits for the largest and highest performing hedge fund managers topped $800M last year.

If you are viewing this by email via my daily daily hedge fund newsletter please click here now to view this video.

- Richard

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