KUHN CAPITAL Monday, October 23, 2017
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Now the Hedge Fund/PE Group "Hybrid"

7/16/06

We recently read of the fund-raising successes of New York-based Laurus, now increasing its $1.2B under management by $50M per week according to HFMWeek.

Laurusí investment strategy further obscures the increasingly fuzzy line between private equity groups and hedge funds. PE groups have traditionally made long-term control investments in the equity of private operating companies.

Hedge funds typically take short-term minority equity or debt positions in widely-traded instruments to capitalize on temporary pricing differences between that investment and another one somewhere else.

That said, there are plenty of exceptions like hostile-bidding hedge funds and PE consortiums who take $8B public companies private.

Now comes Laurus, specializing in private investments in public equity (PIPES). Used to be that PIPE merchants were a bit unsavory: in and out fast, they were the last resort of stressed microcaps who would sell heavily discounted shares sometimes accompanied by a set of terms so onerous that if the target failed to meet them, the result was a quick takeover (aka, toxic PIPES).

But Laurus says itís not toxic and not even the usual PIPE purveyor. Rather, the firm takes long term positions in microcaps and says it wonít short the shares. Specifically, Laurus buys three-year collateralized bonds that convert to stock when the shares appreciate about 10%.

Promising not to short doesnít mean Laurus is prohibited from seeking unrelated investments to hedge these bonds. That sort of activity would put Laurus more clearly in the hedge fund category. Nonetheless, Laurus seeks to go long in successful smaller companies: that sounds like private equity.


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