leverage

More hedge funds to tap capital markets?

Jim Kim — Mon, 28 Jul 2008 14:47:12 -0400

The KKR move to become a publicly traded company throws the spotlight, once again, on alternative investment companies and the public markets. We may see more private equity companies try to somehow follow suit. The case for more hedge funds tapping the markets seems even more compelling. Financial News Online notes a recent Celent study that found more hedge fund firms seeking permanent capital to get through the fallout from the ongoing credit crunch. The fact is that prime brokers haven't exactly turned the leverage spigots back on, and it's unclear if they ever will. So more might follow Citadel, which became the first hedge fund firm to issue bonds in 2006. Others will seek to follow the likes of Man and Fortress and become public companies. While the benefits of a public offering are obvious, it's unclear whether investors will readily snap up such issues. At some point, hopefully sentiment will change.

For more:
- here's the Financial News Online article

Related Article:
KKR to go public after all

Merrill Lynch's ace up its sleeve

Jim Kim — Wed, 23 Jul 2008 13:35:02 -0400

KBW has put a value on Merrill Lynch's 49 percent stake in asset manager BlackRock: $30 to $35 billion, reports MarketWatch. This qualifies as a crown jewel in the Merrill portfolio of assets. If it had to sell half--we assume that BlackRock isn't going to tank; it's held up fairly well in this crisis--it could raise more than $15 billion. That's a significant amount of capital. We can only hope that Merrill Lynch will not have to fall back on that option. Recall that Merrill Lynch CEO John Thain and BlackRock CEO Larry Fink held extensive discussions about such a deal recently. On a related note, Merrill and BlackRock have amended their shareholder and distribution agreements. Merrill Lynch picks up more latitude to "form or acquire asset managers substantially all of the business of which is devoted to nontraditional investment management strategies such as short selling, leverage, arbitrage, specialty finance and quantitatively-driven structured trades," according to a filing. Not that Merrill ought to be jumping into these areas right now.

For more:
- here's the MarketWatch article

Just how unique is Goldman Sachs?

Jim Kim — Fri, 20 Jun 2008 07:24:55 -0400

Breakingviews.com strikes a note that we've hit on recently: Goldman Sachs has separated itself from its peers. While Goldman has remained extremely competitive, a lot of good companies are stumbling as they try to keep up. You can't just automatically start generating predictable, steady gains on principal transactions. You can't just automatically start hedging better. Still, you have to wonder how long can all of this last? Clearly, it is innovative. And it is benefiting from the fear in counterparty-land that has bolstered its prime broker business. But Goldman Sachs still faces the industry's big question: What's next? As it takes on less leverage and risk, it needs to find a way to get back to growth. No one sees how yet.

For more:
- here's the article

Another hedge fund in trouble?

Wed, 02 Apr 2008 07:59:55 -0400

Pardus Capital Management, a New York hedge fund, became the latest to halt redemptions, according to Financial News Online. The twist here is that the fund was not a credit fund--and it used no leverage. Rather, it invested in a small number of stocks, such as UAL and General Motors and Virgin. It remains to be seen if we'll see a wave of equity-oriented hedge funds take a fall. The move is another reminder of the extreme volatility that many funds face. Investors in this fund however, while unhappy, may be better off riding out the storm.

For more:
- here's the Financial News Online article

Related Articles:
More hedge funds shutting down redemptions. Article
Another Bear Stearns fund in trouble? Article
Another hedge fund to close. Article

Does the use of multiple prime brokers boost risk?

Wed, 27 Feb 2008 06:59:55 -0500

Although most hedge funds use more than one prime broker, the question remains: Does this pose any problems for investors? The Financial Times reports that the GAO is concerned that when information is held by several service providers, and not readily shared, it makes it harder to assess the amount of leverage used by a single fund. Even if this information were available, it would be hard to decipher. The study also found, however, that hedge funds have seen an increase transparency and instituted higher standards since the LTCM meltdown in 1998.

For more:
- here's the Financial Times article

Smart money on small buyout firms?

Wed, 28 Nov 2007 06:59:54 -0500

The big boys in the private equity game are struggling a bit, but not so much for the little guys. Smaller private equity firms have been chugging along. They generally rely on leverage less to close deals and thus haven't been slammed as hard. Firms that target transactions of around $100 million or less tend to rely on bank financing, and that spigots appear to be open. For now, the most competition comes from venture capital funds. But small buyout firms can offer some advantages. I think it is only a matter for time before the big boys to find a way to profit from the middle market.

For more:
- here's the Financial News Online article

Related article:
- What should banks do about buyout loans?

Behind the Bear Stearns hedge fund fiasco

Wed, 17 Oct 2007 06:59:56 -0400

The implosion of Bear Stearns is still making news. Business Week Online has taken a close look at confidential financial statements and has concluded that the funds were virtually built to crumble if the market turned down. Which of course it did. There was little art or science to the Bear Stearns High-Grade Structured Credit Strategies fund and High-Grade Structured Credit Strategies Enhanced Leverage. Apparently, they both merely borrowed money (lots) and bought as many CDOs as they could. Others were buying too, which drove down yields, which forced the funds to buy more. Another flaw, one fund gave Barclays the odd ability to pull the plug, which it did. And the rest is history. A proverbial cautionary tale if there ever was one.

For more:
- here's the must-read Business Week Onlne article

Related articles:
- Skepticism about all those hedges emerge
- Bear Stearns to launch new hedge fund index

The upside changes to private equity deal making

Fri, 28 Sep 2007 06:59:57 -0400

Most people assume that the credit crunch has given private equity firms a strong punch right in the gut. Short-term that appears to be the case. Just look at the stock of the Blackstone Group. But as CNNmoney.com reports, there are some upsides, depending on your point of view. While volume is bound to decline, the quality of future deals may well go up. Ernst & Young suggests that leverage-driven deals might take a back seat to earnings and fundamentals-driven deals. Other debt-driven practices may also abate, notably the debt-financed dividends that most funds have feasted on. It may be that funds must wait a bit longer to stage exist, via offerings or strategic sales or sales to another company. Some would argue that this is good news, especially if you are a target.

For more:
- here's the CNNmoney.com article

Hedge fund woes spreading to art market?

Thu, 13 Sep 2007 06:59:55 -0400

One chuckles to think of hedge fund managers as patrons of the arts. But they were certainly huge buyers in the boom times. Prestige works became huge status symbols, and the market really soared. Now, Financial Week reports that the art market is experiencing some ripple effects, though no one thinks the market is about to crater. The talk is that more hedge fund collectors are making inquiries about using their art as collateral for personal loans. More leverage, sheesh. There are stronger indications that more hedge fund managers are selling their art collections outright, which may be prompting others to sell. Hey, getting stuck with an illiquid bond is bad enough. There are a few high profile auctions coming up, and people will use them as a barometer of change.

For more:
- here's the Financial Week article

The big, big picture: the on-going credit crunch

Tue, 28 Aug 2007 06:59:55 -0400

Business Week Online has weighed in with a big story on the on-going credit crunch, wrapping up the whole enchilada--with a bit of salsa. The excess in the mortgage industry, the reliance on leverage, the frenzy in the buyout industry. You've read it all before in bits and pieces. If you apply a corollary to the Newsweek cover story theory, this may signal the end is here. The cover of the magazine is prime journalistic real estate, and it may be suggesting that the really bad news is out. That's a theory of course. Still, reading the long article, you might get the feeling that an era has passed...which will pave the way for the next cycle, the next big thing. You will survive.

For more:
- here's the Business Week Online article