The world’s largest private equity funds advisor, Hamilton Lane, has admitted its prediction that private equity and hedge funds would converge was wrong, and is unwinding its three-year old stake in The Richcourt Group, a global hedge fund-of-funds.
The chief investment officer of the US$90 billion implementer and fund-of-funds manager, Erik Hirsch, said while visiting AustralianSuper and potential clients last month that hedge fund managers had proved to have “different DNA” than private equity professionals, and the synergies between them had proved less than expected when Hamilton Lane bought a majority stake in Richcourt from hedge fund administrator, Citco, in 2004. “The two areas where [private equity and hedge funds] have touched are in mezzanine lending – where the hedge funds simply won out because of their lower costs of capital – and distressed debt, which used to be a big private equity strategy but has almost totally migrated to the hedge fund side.”
Hirsch said the irretrievable differences between private equity and hedge fund practitioners was brought home to him recently, when a Wall Street prop trader told him excitedly about a market trend “that he’d observed starting three hours ago…I mean as private equity managers we don’t care about what’s happening in the next week or month let alone three hours, we’re focussed on years.”
The majority of Hamilton Lane’s business is in running customised separate accounts for large institutions like AustralianSuper, but the group from Bala Cynwyd, Pennsylvania also has specialised fund-of-funds covering private equity secondaries, Chinese private equity, and the traditional broad-based approach, as well as raising a pool of money alongside which it co-invests.
The minimum customised account that Hamilton Lane will consider implementing is US$100 million. Even that amount of money is speaking louder in the private equity world post mid-2007, where according to Hirsch the largest deal capable of being done would have an enterprise value of around US$5 billion. (Prior to the credit spread blowout, the largest deals done were KKR/Texas Pacific’s US$49 billion purchase of Texan utility TXU, and Blackstone’s US$39 billion takeover of Equity Office Properties Trust.)
Hirsch said the buyout market was also being constrained, at both the large and mid-market levels, by the reluctance of sellers to accept a lower multiple of earnings for their businesses than their peers may have two years ago. The mega buy-out vintages of 2005 to 2007 would “be okay”, Hirsch said, owing to the “bulletproof capital structures” of large players like KKR and Blackstone, where the luxuries they were granted by their bankers (such as ‘payment in kind toggles’ allowing debt repayment to be switched from cash to shares at the debtor’s discretion) would allow them the breathing space to work out any problems.
“It’s the smaller, mid-market players that the banks are coming down harder on, they don’t want to pick fights with the big guys,” Hirsch said.
The CIO remained fairly upbeat on US large and mid-market buyouts, but predicted that holding periods would become longer as the economy weakened. Asia was attracting most of the capital that large private equity investors had reallocated away from the US, Hirsch said, but he questioned whether growth in the region would continue to justify the high prices being paid.