Increasing Competition in Hedge, Buyout Funds

Thomas H. Lee Partners, manager of the second-biggest U.S. buyout fund, plans to raise at least $6 billion for takeovers. Carlyle Group is starting two hedge funds to compete in an industry that’s encroaching on its turf.

Boston-based Thomas H. Lee will seek at least as much as the $6.1 billion that went into its last fund, co-President Scott Sperling said in an interview. Carlyle, the world’s third-biggest buyout firm, will raise one hedge fund to buy and sell securities and one to invest in other hedge funds, said David Rubenstein, co-founder of the Washington-based firm. Both men spoke Wednesday at an industry conference in Frankfurt, Germany.

Buyout funds and hedge funds may eventually “converge,” said the 55-year-old Rubenstein. “Hedge funds have an enormous amount of capital. Private equity firms need to recognize that and adapt, otherwise they will become dinosaurs.”

Managers of takeover funds and hedge funds are increasingly vying for the same assets. Hedge fund manager Highfields Capital Management made a $3.25-billion bid on Feb. 15 for Circuit City Stores Inc., the No. 2 U.S. electronics retailer. Kohlberg Kravis Roberts & Co., the world’s biggest buyout firm, was part of a group that outbid hedge funds in July to acquire U.S. power generator Texas Genco Holdings Inc. for $3.65 billion.

There are about 9,000 hedge funds with almost $1 trillion of investments, compared with 3,000 private equity funds with $150 billion of capital that’s yet to be deployed, Rubenstein said.

Competition from hedge funds to buy companies “will continue until there are large losses,” Rubenstein said. Hedge funds are loosely regulated investment pools that typically buy and sell securities rather than entire companies. Buyout funds try to boost the performance of the companies they acquire and can hold assets for as long as 15 years.

Thomas H. Lee plans to avoid competitors by raising one of the industry’s biggest funds to buy larger assets, Sperling said. The firm’s last fund was the largest of its kind when it was raised in 2001.

One of the firm’s most successful investments was the $135-million purchase of Snapple Beverage Group Inc. in 1992. Snapple was sold two years later for $1.7 billion.