For some time now private equity firms and hedge funds have been crossing paths. Hedge funds have entered the marketplace for private equity deals, and private equity firms have aligned themselves with or started their own hedge fund arms.
John O’Neill in the Boston Business Journal writes that the two types of firms have more in common than previously believed. Although private equity firms feel infringed upon, it is only with the active participation of hedge funds can private equity firms find profitable exits from their deals. O’Neill writes:
On the surface, one could understand why private equity firms may be worried about hedge funds. As hedge fund companies have exploded in numbers and assets under management (8,000 and $1 trillion, respectively, according to Hedge Fund Research Inc.) they have increasingly been chasing returns wherever they can find them, in alternative asset classes like private equity and elsewhere. Most PE firms that we survey have not competed directly against hedge funds for deals, but that will likely change, because hedge funds are now pursuing illiquid investments that were once the exclusive domain of PE firms. As an example, hedge funds are more visible on the LBO front, not just participating, but leading deals.
The auction for Refco’s futures arm is just another example of this trend. Absent a blow-up of some sort, look for this convergence to continue.