Hedge funds aggressively buy unlisted firms

#1
Hedge funds aggressively buy unlisted firms
Private equity investors, a major source of capital for India Inc in the recent past, have a new set of competitors in the country hedge funds. Many Indian entrepreneurs have been wooing private equity funds, since apart from the cash factor, association with a well-known private equity fund improves valuations and credibility.

However, a new set of investors hedge funds are emerging as a source of competition. With more than a trillion dollars under their command world-wide, hedge funds have an insatiable appetite for new investment opportunities.

Investment banking sources say hedge funds are increasingly trawling the Indian markets, looking to invest in unlisted or privately-held companies. Some of the large investors have a corpus of more than $100m ready to be deployed in the market.

Hedge funds have been aggressive investors in the secondary market in the country for a while. They are active directly in the market, as well as through participatory notes.

Recently, hedge funds have been doing the rounds of investment bankers and private companies looking to invest in unlisted companies. Hedge funds have realised that with just a handful of private equity investors in India, there are a lot of investment opportunities to be tapped among private companies. Moreover, they feel that the potential or returns could be much larger in the private markets, compared to public ones.

Private equity investors admit that hedge funds are sniffing around. Raj Dugar of Carlyle Private Equity Fund says, Some of the hedge funds have also started doing the rounds, searching for a toe-hold among unlisted companies, a preserve of private equity funds.

Some industry observers say that with secondary markets at a historic high, hedge funds are looking at new investment options in the country.

Pramod Bhasin, president & CEO, GECIS, which raised funds from private equity investors when GE reduced its holding in the company, says, We also received some offers from hedge funds when we were doing our evaluation. We could not find any clear value in the capital they were bringing to the table. This does not mean that all private equity funds brought value, but the hedge funds were less capable.

Hedge funds generally do not have partners with operational expertise of running companies something which most private equity investors have. Instead, hedge funds have people who are capable of identifying new investment options and valuations differences.

However, this has not prevented hedge funds from aligning themselves with venture capital and private equity funds. Some of the new offerings to investors by hedge funds are positioned as venture hedge funds.

These new funds invest in both short and long-term assets, the objective being to leverage the short-term earning in true blue hedge fund style, while gaining from long-term profits from ventures. A balance of short-term and long-term investment means that these funds are able to deliver returns consistently and regularly over their life cycle.

Typically, a venture capital fund will not show returns for the first couple of years, after which, the returns will come in spikes, as exits happen. In contrast, hedge funds often show a rapid rise in valuation in the short term, but may be too risky for returns in the long term.

Hedge fund managers are trying to balance long-term returns by investing in an early stage or even in unlisted companies in private equity to iron out the spike in returns over the life cycle of the fund.

In the US, while hedge funds continue to charge high fees, they are no longer content with shorting shares or pursuing other hedging strategies; theyre now seizing control of companies, according to international magazine BusinessWeek . Moreover, hedge funds and their affiliates have announced deals for at least 23 companies, valued at about $30bn in the past year.

Vinod Sethi, investment advisor to private equity and hedge firms, says, If hedge fund investors start investing in unlisted companies, then valuations are going to get stretched. I dont think it will reach a stage where competitive bidding will take place between private equity and hedge funds, as most private equity funds would like to avoid such a situation. I dont think hedge funds have the skills to invest in unlisted companies.

Mr Bhasin believes that private equity funds will generally have an advantage over hedge funds. It is unlikely that hedge funds will lead an investment. At the most, they may ride on the coat tails of private equity investors. Entrepreneurs may also not be so keen on hedge funds leading an investment, he says.
 

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