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Private equity investors buy up illiquid hedge fund assets

Date: Wednesday, April 11, 2012
Author: David Walker, Investment Europe

Private equity investors are moving in on hedge funds with illiquid assets they want to get off their hands in a switching of ‘problem assets' between sectors of the alternatives industry.

Florian de Sigy (pictured), founder of Gamma Finance LLP, which connects buyers with sellers of such stakes and advises market participants, highlights as sellers some credit hedge funds that began lending money to businesses privately, sometimes secured against hard assets, during the crisis.

During 2008 and 2009, many saw revenues plunge and loans become impossible to service, so the hedge fund lender took control of the assets "and as a result, exit horizons were considerably extended when compared to the original investment".

The borrowers, who have sometimes since restructured and recovered, are now partially or wholly, and often unwillingly, controlled by the hedge fund.

"This situation has created several positive outcomes", says Ben Keefe, director and head of advisory at Gamma Finance.

"First, the restructuring of credit hedge funds into portfolios of minority and controlling equity positions provides a new and previously untapped source of investments for the private equity sector. Second, this benefits the hedge fund managers because they can access a new pool of specialist capital that can be used to meet outstanding investor redemptions.

"And third, it is positive for the underlying company, whose shares pass into the hands of experienced, long-term investors who are well placed to help develop and maximise the potential of their business over time, without the immediate need to meet investor redemptions."

An example of an illiquid holdings portfolio from Gamma shows how wide the range of sectors the problem assets can represent - from real estate to consumer finance, healthcare to TMT, and even aerospace and defence.

Keefe added the assets can be spread around the world, and be at various points in the company's capital structure.

"Appetite for direct acquisition of these assets is just one of a number of emerging trends in the hedge fund secondary market at present."

He emphasises the market is no longer characterised by stressed selling, as it was in 2009.

Activity is now a result of holders - not always hedge funds and sometimes banks for example - "assessing their legacy illiquid holdings in light of regulatory initiatives such as Basel III and Solvency II, whilst other may be motivated to wind down leverage positions or simply clean their books".