Buyout, hedge funds recover from storm

Packs of U.S. one hundred dollar bills are counted at a bank in Westminster, Colorado November 3, 2009.

NEW YORK/LONDON (Reuters) - Private equity and hedge funds that were hit by the storm of the financial meltdown are now benefiting from a return of bank financing, deals, and pockets of opportunity to exit investments.

Buyout firms have benefited from higher valuations for their portfolios and the ability to take some of their deals public, as seen by earnings released this week from Blackstone Group (BX.N) and Kohlberg Kravis Roberts & Co KKR.AS.

Hedge funds, which were hammered by losses of 19 percent in 2008, rode last year's market rally to return 20 percent in 2009, according to Hedge Fund Research.

Still, executives face a challenge in generating returns and meeting investor demands for lower fees and more information from their portfolios.

"It will be harder to make performance," said Elias Tueta, co-founder of Hedgebay, a secondary market for hedge funds. "The people who perform this year will be the real stars."

Top executives from both industries will discuss at the Reuters Private Equity and Hedge Fund Summit strategies to make money in 2010, now that companies and many stocks and bonds are no longer as cheap as they were a year ago.

The three-day summit, being held concurrently in New York, Hong Kong and London from Monday to Wednesday, includes executives from some of the largest private equity and hedge funds in the world.

As financing and the ability to leverage deals returns, private equity firms are competing hard for deals, and auctions are drawing crowds of names.

"You have got a huge amount of private equity money chasing a small amount of decent assets that are being brought to market," said Simon Tilley, head of the European Financial Sponsors Group at Close Brothers Corporate Finance.

The thawing has been welcomed by firms which have been sitting on huge amounts of "dry powder," or available capital to spend.

Tilley said a number of firms which raised capital in the strong fundraising climate of 2006 and 2007 face an ever-narrowing window in 2010 to deploy capital before their five-year investment period expires, at which point they have to go back to limited partners (the investors in private equity funds) to extend the period or cancel some of their commitments.

This can have pretty serious negative consequences. If LPs feel firms have not managed their commitments well, they may not want to invest in subsequent funds, he cautioned.

"A few investors are willing to pay reasonably high prices, and that's to do with where they stand in their funds, and that's not necessarily a good thing," Martin Hintze, managing director Principal Investment Group Goldman Sachs International (GS.N), told the London Business School private equity conference in London.

Meanwhile, raising new capital has become a lot tougher.

PERFORMANCE TOUGHER

Many hedge funds hope that an uptick in mergers and acquisitions will provide something for arbitrageurs to chew on.

"We have a view, as do others, that M&A in Europe is likely to come back this year," said Eddie Guillemette, managing director in Bank of America Merrill Lynch's prime brokerage business.

"Cadbury CBRY.L had a lot of interest from clients, and if the calendar stays strong we see a lot of interest in that type of fund for 2010."

Executives will also opine on how to meet investor demands for more information on what funds hold and proof they are not investing in another Bernard Madoff-style fraud, without eating into margins too much.

Many investors are still angry after a large number of funds stopped them getting access to their money during the crisis, when assets that were sought after in the boom times suddenly became hard to sell.

"A strong theme is increased shareholder activism, as a result of the erosion of trust. It's given rise to a 'no surprises' culture. People need certainty of where assets are," said David Aldrich, head of securities industry banking at the Bank of New York Mellon, Europe.

However, it could be harder for investors to secure some of their demands, particularly for lower fees, now that clients are already putting money back into hedge funds -- in the fourth quarter they invested a net $13.8 billion.

"Investors will definitely call the shots on getting information and they will probably be putting downward pressure on fees, but with a limited degree of success," said Jerome de Lavenere Lussan, managing partner of hedge fund consultancy Laven Partners.

(Editing by Matthew Lewis)