Two become one: all signs point to continued trend of private equity and hedge fund convergence.Nearly a year has passed since Grant Thornton and the Association for Corporate Growth first discussed the growing trend and potential impact of private equity and hedge funds hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" converging con·verge v. con·verged, con·verg·ing, con·verg·es v.intr. 1. a. To tend toward or approach an intersecting point: lines that converge. b. in their whitepaper, Blurring of the Line: Private Equity and Hedge Funds are Converging. And while the trend toward convergence strongly continues, several new trends have developed. THE NEED FOR A ROBUST DUE DILIGENCE Research; analysis; your homework. This term has caught on in all industries, because it sounds so "wired." Who would want to do analysis or research when they can do due diligence. See wired. PROCESS Generally, private equity investments tend to be relatively illiquid Illiquid An asset or security that cannot be converted into cash very quickly (or near prevailing market prices). Notes: A house is a good example of an illiquid asset. See also: Cash, Liquidity Illiquid In the context of finance. . As a result, private equity investors must take a longer-term view of their portfolio companies. This view may be only five to seven years down the road, but one may run into a down cycle in the company's industry or the economy in general during this period. Private equity investors historically prepare to ride out these bumps bumps a term used to describe a variety of papulonodular dermatoses in horses, including 'heat bumps', 'feed bumps', 'protein bumps', 'wheat bumps' and others. No specific disease or etiology has been assigned to the term and veterinary dermatologists wish it would disappear from use. through extensive due diligence prior to closing the transaction, understanding that this process helps uncover any issues that might impact the purchase price or valuation of the company and identifies potential issues that might arise during the holding period. Due diligence has always been an important concept, however, hedge funds are new to the private equity type investing game and and sometimes shortcut (1) In Windows, a shortcut is an icon that points to a program or data file. Shortcuts can be placed on the desktop or stored in other folders, and double clicking a shortcut is the same as double clicking the original file. the process. Now that hedge fund investors have adopted a private equity strategy, they are more often employing a traditional due diligence process. We are seeing fewer private equity-like hedge funds omit o·mit tr.v. o·mit·ted, o·mit·ting, o·mits 1. To fail to include or mention; leave out: omit a word. 2. a. To pass over; neglect. b. this very important step in the transaction process. Hedge fund investors understand the need for due diligence to better understand the target company and incorporate their findings into the terms of the transactions. Once a transaction closes, the buyer controls the company and generally has an illiquid investment. Any shortfalls in expectations, such as uncollectible accounts Uncollectible account An account which cannot be collected by a company because the customer is not able to pay or is unwilling to pay. receivable, obsolete inventories Obsolete Inventory Term that refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period of time usually determined by the industry. This type of inventory has to be written down and can cause large losses for a company. and poor customer relations will impact future earnings and value. If the buyer has not built into the purchase agreement mechanisms to adjust the purchase price or recover damages under indemnity Recompense for loss, damage, or injuries; restitution or reimbursement. An indemnity contract arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual. provisions, then these shortfalls impact the ultimate return the buyer will realize on this investment. More and more, they understand that post-closing, they will pay a steep price for not having obtained insight into various issues and potential problems during the due diligence phase. Additionally, hedge fund investors are realizing the benefit of developing a comprehensive transition plan and forward-looking plan based on their findings. This is important since, in many cases, it will be necessary to work through these problems. This can take the form of providing additional capital, temporary working capital lines or accessing alternative financing, or in some cases, it may mean providing human capital in the form of time and resources to work with the portfolio company during the "rough periods." Alternatively, and certainly a better option, a full due diligence process will give an investor the ability to anticipate such problems and take action to avoid them. Often, these steps are necessary to realize the maximum value on a long-term alternative in a private equity investment. HIRING OF EXPERIENCED PRIVATE EQUITY PROFESSIONALS More frequently, the individuals running the private equity strategy at a hedge fund are professionals hired individually or en masse en masse adv. In one group or body; all together: The protesters marched en masse to the capitol. [French : en, in + masse, mass. from existing private equity funds, which makes a great deal of sense since they understand the nuances and characteristics of making and holding private equity investments and portfolio companies. [ILLUSTRATION OMITTED] While this will likely lead to more competition to hire qualified professionals, it likely won't lead to a brain drain brain drain n. The loss of skilled intellectual and technical labor through the movement of such labor to more favorable geographic, economic, or professional environments. on private equity because there are so many qualified people out there to choose from. Meanwhile, the trend of hedge funds hiring experienced leveraged buyouts leveraged buyout, the takeover of a company, financed by borrowed funds. Often, the target company's assets are used as security for the loans acquired to finance the purchase. professionals is a positive sign in terms of a movement toward best practices. It seems this trend will continue with, perhaps, even a trend toward hedge fund families acquiring niche private equity firms to fill these rolls. TIGHTENED TIMEFRAMES TO COMPLETE TRANSACTIONS Even with an increased focus on due diligence, private equity professionals have noted that already tight timeframes to complete transactions are becoming even more compressed as a result of hedge fund investors' tendency to accelerate the process. Private equity players are concerned that they will be at a disadvantage if they conduct their normal processes while a potential hedge fund investor competing for the same target company puts forth a faster timeline
Timeline may refer to:
In the short term, there may be instances where a bidder who is willing to shortcut the investigation process wins some deals based on a shorter closing period. However, should one or two of these deals run into unforeseen problems, investors will likely be less willing to use a compressed timeframe. INCREASED COMPETITION In discussions with clients and others in the private equity community, we continue to hear about greater competition and higher prices for acquisitions, as well as increased competition for limited partner's capital when it comes to fund-raising fund-raising, large-scale soliciting of voluntary contributions, especially in the United States. Fund-raising is widely undertaken by charitable organizations, educational institutions, and political groups to acquire sufficient funds to support their activities. . Both of these issues are discussed on panels at almost every merger and acquisition conference. This trend doesn't seem to be abating anytime soon, as it is a logical result stemming from more players in the private equity type investment space. EVOLUTION OF PARTNERSHIP AGREEMENTS We have seen hedge fund firms ask to include more traditional hedge fund terms in the partnership agreements for their new hybrid funds and private equity funds. It remains to be seen how far this trend will go, whether it will be accepted in the marketplace and what impact it will have on traditional private equity fund partnership terms. Today's credit markets will likely produce another trend. Hedge fund families often have the ability to finance entire capital structure under one roof. Anytime we enter into a market of tighter credit availability, sellers become concerned about a buyer's ability to obtain the necessary financing to close the deal. There have been several instances in the marketplace where hedge fund families have cited their ability to provide one-stop financing as an advantage to provide sellers with a certainty to close. How much impact this has on the selection process for determining the winner in a competitive bid process remains to be seen. Convergence continues to evolve as existing trends develop and new ones appear. At the same time, new questions and issues arise. We still have not seen how the limited partner investment community will react to convergence in the long term, and we may not see any measurable impact until another year or two. Despite the uncertainty, though, the trend itself does not seem to be going away. Dan Reid is a partner and national practice leader of Transaction Advisory Services advisory services advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal with Grant Thornton in San Francisco San Francisco (săn frănsĭs`kō), city (1990 pop. 723,959), coextensive with San Francisco co., W Calif., on the tip of a peninsula between the Pacific Ocean and San Francisco Bay, which are connected by the strait known as the Golden . You can reach him at dan.reid@gt.com. RELATED ARTICLE: CONVERGENCE Want More? The convergence of hedge funds and private equity will be the topic of an upcoming CalCPA webinar: Date: Tuesday, Nov. 27 Time: Noon-1 p.m. CPE (Customer Premises Equipment) Communications equipment that resides on the customer's premises. CPE - Customer Premises Equipment : 1 hour Cost: $55/members; $75/nonmembers Register: Sharon Mumford, sharon.mumford@calcpa.org. |
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