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Hedging the Private Equity Industry
According to Alternative Investment News, giant buy-out group KKR is launching its first hedge fund, a $1 billion war chest focused on buying bonds and secondary market loans as well as on direct lending. It's another example of how these two types of funds are groping their way towards peaceful coexistance.
The new KKR fund will offer two share classes, one with a 2% management fee and a 20% performance fee coupled to a two-year lockup, the other with a 1.5% management fee and 15% performance fee requiring a five-year lockup. While this fund may indeed enter into classic arbitrage hedging, those relatively long lock-up periods sound more like a PE firm.
Last year KKR co-founder Henry Kravis was quoted as saying that hedge funds were good at picking stocks, but they didn't have the expertise to buy and run companies. Now he sees the two asset classes as complementary, with hedge funds and PE groups both participating in deals.
As further elaboration, The Carlyle Group's David Rubenstein has said that hedge funds are useful agitators in putting companies into play, allowing PE firms to act like white knights.
We agree, and for this reason we expect to see more partnerships or shared ownership between hedge funds and PE groups in 2006.
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