Gamma Finance’s Florian de Sigy on private equity’s hunt for hedge fund stakes

Although fundraising has slowed a little in the last quarter, levels of capital raised by private equity investors in 2011 have been a significant improvement on the prior two years.

According to Preqin, over 60% of institutional investors are planning to increase their private equity commitments by mid-2012, and less than 10% are planning to reduce funding. In the private equity real estate market, the figures are even more bullish: over 70% of investors plan to increase their commitment to such projects.

The issue now for many managers of private equity funds is how best to put this capital to work.

Whilst there are many businesses out there seeking investment and funding, this does not mean that there is a limitless supply of quality, accessible investments.

Indeed, reports are that originating new transactions is increasingly challenging.

With usual lines of supply approaching exhaustion, where should private equity fund managers start looking?

The answer may be surprising to many, but at Gamma Finance we see many such opportunities on a regular basis: within the portfolios of illiquid hedge funds.

Prior to the post-Lehman financial crisis, the hedge fund sector experienced a significant growth, with funds seeking alpha through the increasing use of leverage, and the utilisation of increasingly long-dated investments.

Asset-backed loans and credit instruments with a six to 18-month exit point became popular, whilst other funds started to encroach on those areas more traditionally associated with private equity.

Wind forward four or five years, and the situation has changed significantly. There currently remains around $70bn of illiquid hedge funds that had to introduce gates and suspend redemptions as their underlying assets became too illiquid to meet investor redemption requests.


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