Hedge funds wade in for Peacock

UK discount retailer Peacock Group has agreed to a management buyout backed by US hedge funds Och-Ziff and Perry Capital. Shareholders are offered 340p a share in a deal that values the company at £404m. Peacock’s closing price has risen by 29.2% since August 15.

The hedge funds and Echelon, the investment vehicle of John Lovering, the former chairman of Peacock, are backing the buyout in association with Goldman Sachs. They are investing £200m of equity between them, while Goldman Sachs is also providing a £175m loan. There is also a £55m mezzanine strip and a £55m mezzanine PIK with warrants provided by the hedge funds.

Hedge funds have previously tended to acquire controlling stakes by buying the stressed debt of bankrupt companies during workouts and then pushing for a debt-for-equity swap. The lack of opportunities in the distressed market, however, has forced them to look for other ways to invest their capital. As a result, hedge funds are increasingly interested in taking control of performing companies through the equity.

Hedge funds are also attracting a different type of clientele, including pension funds. Previously they were seen as an investment tool for parties that could afford to take on risk.

Peacock is one of the first examples of this type of hedge fund investment strategy in Europe, suggesting that distinctions between hedge fund and private equity investments are indeed blurring.

The company, which was understood to have been approached by a private equity bidder in March, is a reasonably attractive takeover target because it has so far managed to buck the deteriorating spending trend on the UK High Street. It reported a 6.1% rise in sales for the 13 weeks to October 1.

“The businesses that hedge funds typically buy are those with a stable and recurring cashflow, where leverage is fairly low and where there are components to the business,” said one Europe-based hedge fund manager. “The fact that hedge funds are looking at longer and longer locked up money means that they are chasing the same assets as private equity.”

“There are investment opportunities out there,” said another hedge fund manager. “Why should it only be private equity houses that seize them? Hedge funds can extend their maturity profile and are able to compete.”

But capital markets bankers believe the deal is a one-off and do not expect to see a sudden surge in hedge funds investing in healthy businesses. This is because most hedge funds are not set up to run regular M&A buyside processes, such as taking over the operational management of companies.

“To suggest that this is the early signs of a trend implies that it will continue and grow apace, but in my mind I think it is going to be more sporadic,” said one senior capital markets source. “We are not going to wake up tomorrow and find a situation where Och-Ziff is bidding alone against Permira in an auction, for example.”

Bankers also said that the longer-term nature of private-equity style investments might make hedge funds think twice about the strategy.

“Hedge funds are known to want a quick return and they are not going to be able to flip out of these investments in a matter of weeks,” said another source, who added that it was more likely that private equity and hedge funds would team up for assets.