Hedge fund pay

“Hedge funds are a remuneration strategy masquerading as an asset class,” said Jonathan Blake, the originator of the limited partnership structure for private equity funds, at a recent conference. And, as a remuneration strategy, the hedge model can look very attractive indeed, particularly to top-flight graduates, who are deciding between a career in the private equity or hedge fund world.

Although the private equity fund model is spreading to related asset classes, it has remained static. The core economic terms are the same immutable 80/20 split that they ever were. Both investors and partners are bound in a long-term embrace that does not become rewarding until several years down the line.

Hedge funds promise more instant gratification. Management fees of 2% to 3% and carried interest paid at a generous 35% per year based on NAV can be found. The danger is that tomorrow’s stars will prefer the promise of hedge fund jam today, rather than jam tomorrow with the buyout shops, especially as the type of deals under consideration are converging.

If the only difference between the two is remuneration, hedge funds appear to have the more compelling model. Recent reports from US private equity players bear this out, as they complain that the best young talent is gravitating to hedge funds. The answer for the buyout houses, is jam today in the form of deal-by-deal carry. But how much lee-way will their investors give them in an asset class that has already become disturbingly conservative in terms of fund structures and remuneration?

Growth struggle

It is now more likely than ever before that private equity shareholders will find a corporate buyer for investee companies, thus avoiding the vagaries of the public equities market altogether. Goldman Sachs, Apollo and TowerBrook Capital are just reaping the proceeds from a sale of cable company cablecom to Liberty Media. Although it has been common for private equity firms looking to exit to run a dual-track process, there had been little indication that a trade sale was being considered in that case in addition to the float.

The sale price is probably lower than the proceeds from an IPO, but cablecom’s backers may have preferred the certainly of a cash bid in the face of greater selectivity among investors in the public market.

Telenet, cablecom’s Belgian sector peer, has already felt the impact of changing conditions. It struggled to price its IPO at the bottom of its indicative range, and then the shares sank by 8% at debut.

The scenario has implications for all the other private equity-backed cable companies that have LBO debt outstanding. Satellite company Eutelsat is on course to pay down €860m courtesy of its upcoming IPO, but remaining growth stories in the cable sector, a weaker investment prospect than satellite, may suffer going forward as investors turn more towards defensive plays.