Febrero 11, 2007   

Can Hedge Funds go public?


Juan Toro

This seems odd but it is as it sounds. On Friday, we had the first hedge fund going public in the NYSE: Fortress. The main differences relative to others is how its assets under management are distributed. They have approximately 30 bn dollars distributed as: a) 60 % is in private equity; b) 30 % on hedge funds; c) 10 % is in real state.

Demand for shares surpassed expectations and investors demanded more than 27 times the amount made available. Prices skyrocketed and closed up 70 per cent. Amazing and bizarre is the valuation priced in. Fortress had a valuation of about 37 times earnings. Others within the business are likely to follow given the reception from the market. Among then probably Citadel or D.E. Shaw. This sounds like the dot com frenzy. A large portion of profits in Fortress comes from the hedge funds side business in the form of management fees and these are highly volatile. The twist is probably in the investment mix, but still that is no reason for that high valuation. Lex from the FT put it bluntly: “Fortress’s valuation still looks more like a house of cards than a bastion of stability”.
We will see more of this.


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Posted on 11 Febrero 2007 in Financial Markets

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Comments

But, what is the interest of a basically, a private equity company, to go public? Its main advantage is been leveraged, isn’t it?

What I mean is that, a private equity bases its success in having a small WACC due to the high level of debt that it needs to make its purchases. This fact means that private equity can pay more money for an acquisition than other enterprises. If they look for finance going to public, issuing shares like a current company, will it not loosing its advantage?


Posted by: José Arango at Febrero 12, 2007 03:55 PM

Hi José. Thanks for your comment. Fortress Investment Group plans to raise $750 which means that investors will own 10 percent of Fortress after the initial public offering (IPO). On the other hand the amount they have under supervision amounts to 29 bns $.
Having said that it is not rare that private equity funds raise publicly money as it has recently happened with two New York-based buyout firms, Apollo Management LP and Kohlberg Kravis Roberts & Co. They both raised money for publicly traded funds in Amsterdam. Though none of these firms (contrary to Fortress) sold any shares in their management companies as Fortress is doing.
Fortress has said that “having publicly traded shares would help it compensate employees, raise capital and provide currency for future acquisitions. Proceeds will help it start funds to invest in infrastructure, real estate and structured debt and to selectively diversify our business”.
It is also understandable that partners might also want to cash in part or the managed experience they have built into the firms.

Posted by: Juan Toro at Febrero 13, 2007 10:22 AM

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