THE WORLD OF PRIVATE EQUITY: Hedge Funds

We sometimes talk about hedge funds in these posts – principally when we’re concerned about their deleterious effects on businesses – during the past year, Toys “R” Us (which they shut down, for the profit derived from that action) and, most recently, Campbell’s Soup Company, that has the misfortune of having a hedge fund attempting to take a similar action with that company.

We rarely talk about Private Equity firms – the firms that are a step further along the deleterious line than hedge funds.  These are the people in so-called “buyout” companies who take fund investors’ cash and earn handsome profits buying and selling companies (one can see how the hedge funds involved in these kind of activities are patterning themselves).  Of recent interest has been the spawning of companies that are betting there is an even more profitable way and that is by buying stakes in the private equity firms themselves.  These moves can mean getting a hefty cut of fees that the buyout (that is, private equity) firms charge as well as a share of the profits from their deals.  Makes one take delight in the possibilities here.  One of the biggest players in this new effort is Dyal Capital Partners, founded in 2011.  Dyal owns nonvoting stakes of 10 – 20% in 19 private equity firms, including the industry’s most successful players – buyout firms like Silver Lake and Vista Equity Partners.  From an article in the WSJ, Dyal and others like them have determined that as “pension and other institutional money managers continue to pour more money into private-equity funds” the best bet is to own significant slices of the buyout firms themselves, to produce even better returns with lower risk.  Instead of waiting for a private-equity firm’s investments to appreciate – and paying fees in the meantime – collecting income starts from day one.  Sounds like a terrific plan – and richly deserved (pun intended) by the private-equitors.

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