For alternative investors, staying in one’s own lane is increasingly considered a constraint on growth; this is evident in the rapid blurring of lines among different assets classes. In recent years, there is a surge of hedge funds making inroads into private equity, either by taking substantial positions in private companies or, in many cases, launching and managing private equity funds alongside their hedge funds. In fact, as reported by CNBC, from January 2021 – September 2021, hedge funds participated in a recording-breaking 770- private deal, according to a Goldman Sachs report.1
To better understand the rapid rise of private equity and why it is enticing to hedge funds, we recently published a whitepaper: Why Hedge Fund Managers are Getting into Private Equity and How to Make it Work. This piece explores the overall industry and convergence of market events that has led fund managers to private markets. For many, expanding product capabilities and asset classes provides an opportunity to retain, grow, and attract investors, as well as increase its bottom line.
Strategy diversification to entice more investors
One of the chief drivers of this strategy is the consistent return on investment that the private markets offer. For firms to retain investors and satisfy their demands for both diversification and higher returns, firms are adopting these strategies to gain exposure to private companies, whose valuations are growing as they choose to stay private longer. One approach is to take direct stakes in early-stage ventures. As noted in the Goldman Sachs report, “Hedge fund participation in private deals that typically involve venture capital and private equity firms has grown ‘enormously’ in recent years as fund managers look to try to boost their returns.” 1
Other firms, though, are going a step further and setting up private equity funds within their own walls, “looking to broaden their appeal with the launch of more illiquid products,” as Hedgeweek observed.2 This approach enables firms to benefit from longer capital lock-ups while delivering potentially higher returns to investors who might otherwise take their money elsewhere.
Not a simple flip of the switch
While the returns are enticing and do broaden investor appeal, many firms are finding that it is not a smooth integration process for rolling closed-end funds into an existing open-end hedge fund infrastructure. There are distinct cultural differences and skill set requirements. For example, many firms may not be familiar with the deliberative valuation process for private equity investments, or with capital call procedures. Moreover, for investors who are prone to watching market movements in real-time, this can be a cultural shift as private equity managers typically take the long view with their portfolio companies.
The growth and popularity of private equity is alluring to hedge fund managers, particularly as they look to entice investors and generate alpha. For more on how firms are responding to this market movement and what it means for a firms operational infrastructure, read our whitepaper, Why Hedge Fund Managers are Getting Into Private Equity and How to Make it Work. For many, introducing an accounting platform that can support both hedge and private equity funds will go a long way toward removing operational obstacles and free firms to focus on the opportunities instead of the challenges. Stay tuned to our next post on how firms can minimize operational complexity when expanding lines of business.
1. Shead, Sam, “Goldman Sachs says hedge funds are increasingly trying to compete with VCs in private deals,” CNBC.com, Sept. 10, 2021. https://www.cnbc.com/2021/09/10/ goldman-sachs-says-hedge-funds-are-competing-more-with-vcs.html
2. Blurring the boundaries between hedge funds and private equity within investor portfolios,” Hedgeweek, August 26, 2021 https://www.hedgeweek.com/2021/08/26/305367/ blurring-boundaries-between-hedge-funds-and-private-equity-within-investor