BusinessWeek – Hedge fund magnate Steven A. Cohen is running with a new crowd on Wall Street. After hiring a seasoned private equity dealmaker in December, Cohen’s $12 billion SAC Capital Partners teamed up with buyout king Kohlberg Kravis Roberts & Co. on a $3.1 billion deal for the higher learning outfit Laureate Education Inc. (LAUR ) in late January.
Cohen isn’t the only hedge fund guy expanding his repertoire. Hedge funds accounted for at least 50 private equity deals in 2006, according to Dealogic. Most recently, Farallon Capital Management joined with real estate investment trust Simon Property Group (SPG ) on a pending deal to buy mall operator Mills (MLS ) for $1.56 billion. ValueAct Capital jumped into the $3 billion deal in December for used-car auctioneer ADESA Inc. (KAR ).
The lures of private equity are twofold. First, hedge funds want to tap the gusher of money flowing into private equity from institutional investors. Second, and more worrisome, hedge funds as a group need a way to boost their performance. The average fund returned 13.9% in 2006, according to the Credit Suisse/Tremont Hedge Fund Index–not much better than the 13.6% return of the Standard & Poor’s 500-stock index. The typical buyout fund soared 25%, according to Mercer Investment Consulting Inc.
True to their nature, hedge funds are exploiting opportunities overlooked by their bigger private equity brethren. While brand-name firms are arranging mammoth buyouts–Blackstone Group’s record $39 billion acquisition of Equity Office Properties Trust (EOP ), for instance–hedge funds are setting their sights on smaller prey. DE Shaw & Co., one of the more active hedge funds in the private-equity space, sank $500 million into Kentucky’s ERORA Group, a private developer of coal gasification plants. It’s a typical size deal for the group.
