ACG InterGrowth Conference: Where hedge funds and PE converge

There's little disagreement among M&A dealmakers that prices in auctions are continuing to climb, increasing competition for transactions among buyout firms and deep-pocketed hedge funds. As competition for deal flow increases financial firms like DE Shaw & Co. and Fortress Investment Group, which are both well known for their hedge investment actitivies alongside players like Black Canyon Capital, are also investing capital in private equity buyouts via side pocket and other sorts of funds.

In the case of Fortress, the New York powerhouse utilizes its side pocket vehicles to make co-investments which support investments made by its larger private equity funds, Kenneth Sands, a managing director at Fortress Investment Group, told an audience at an ACG InterGrowth event on Thursday titled The Changing Faces of the Deal World Part 2: Hedge Funds Go Private.

The rise of side pocket funds isn't a new development, but it mirrors another development in the world of acquisitions.

Panelists at a session moderated by UBS managing director Craig Wadler said the business of buyout groups and hedge funds is converging.

"We are increasingly seeking control in our investments," said Black Canyon Capital co-founder Michael Hooks. Hooks said the firm's portfolio includes a healthy mix of control and minority-stake investments.

Sands, meanwhile, characterized some of the firm's investment as "private equity-like." He also told audience members that Fortress has raised a very unique private equity fund--one with a 25 year hold period. 

Say what?

As an example of a 25 year investment, Sands pointed to the purchase of a rent-regulated apartment building that could be monetized over time through buyouts of tenants. 

It's an example, he said, of a private equity vehicle that's been raised to pursue a unique asset class.

Hedge funds often take control of companies by buying up the debt of distressed businesses at a discount while they are undergoing reorganization, said Pat Collins, a managing director at DE Shaw & Co.

While some private equity firms won't stray from their usual mix of debt and equity in the capital structures of buyout deals, Hooks said Black Canyon is willing to pursue different capital structures depending on whether the firm likes a company. 

Meanwhile, the mystery surrounding the traditionally publicity-shy hedge fund business is continuing to fall away from the asset class, according to Black Canyon's Hooks.