Last Friday Fortress Investment Group hosted its IPO, the first hedge fund to go public in the US. Apparently appetite for the offering was tremendous. Indeed, it opened at $35 a share, nearly double its offering price of $18.50. And the offering raised $634 million for Fortress. Obviously the public viewed the offering as an opportunity to participate in the tremendous profits hedge funds have been able to generate. But I wonder how going public will impact the ability of the hedge fund to continue producing such profits in the long term.
Based on the (albeit limited) scholarship I have read about hedge funds, I was under the impression that lack of significant regulation was part of the reason such funds were able to produce such robust returns and outperform other firms. Indeed, in a recent article on hedge fund activism, Frank Partnoy and Randall Thomas attribute the success of hedge funds to their ability to utilize financial strategies unavailable to more heavily regulated entities. And there has been some suggestion that, because of the greater risk associated with them, hedge funds should be limited to highly sophisticated and wealthy investors.
To be sure, there have been a lot of calls to better regulate hedge funds, and it could be that Fortress just sees the writing on the wall. But while there may be benefits associated with increased regulation of hedge funds, I am not sure that we can obtain those benefits while retaining the huge profits that public investors are surely hoping to receive. Interestingly, several experts have indicated that if hedge fund managers are selling, then it is probably not a good idea to be buying.
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1. Posted by David on February 14, 2007 @ 10:55 | Permalink
My (cynical) guess is that the folks who run fortress are looking to cash out, and do something else. They can make more money taking Fortress public than by trying to sell it to a single buyer. For all we know, they may have tried other exit strategies first.
Generally, the point of an IPO is to either make the owners rich, or bring in capital for growth. Fortress hasn't explained why they need the extra money, and neither the added oversight nor the short term focus is helpful.
2. Posted by 2L on February 14, 2007 @ 13:15 | Permalink
David,
Sure. Selling 8.6% of your company is "cashing out."
Why are we talking about exit strategies? Similar to Citadel's Bond Financing: http://www.informationarbitrage.com/2006/12/citadel.html , this IPO gives Fortress access to capital outside of limited partners and prime brokerages.
At least, the most obvious reason is to have stock for the most common purposes: liquidity, compensation, currency.
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