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Rubenstein sees ‘challenge’ from hedge funds

The co-founder of The Carlyle Group said at a Yale University private equity event that hedge funds currently enjoy advantages over private equity firms in offering financing to companies.

David Rubenstein, co-founder and managing director of The Carlyle Group, said Friday that hedge funds currently present a challenge to private equity firms in their appetite for private financings of companies.

Speaking at the 2004 annual Yale School of Management private equity conference in Old Greenwich, Connecticut, Rubenstein made his comments in a keynote address that covered what he described as challenges to the private equity industry.

He said hedge funds are allocating increasing amounts of capital to private equity deals. But most hedge funds, he added, have several advantages over private equity firms in providing financing to these deals. For example, many hedge funds have generous lines of credit with banks from which they can draw financing instantaneously and in many cases have the luxury of refinancing a deal at a later time.

In addition, he said, many hedge fund partnerships do not require that the GPs share deal fees with investors, a term that is now prevalent among private equity partnerships. He noted that many hedge funds do not have hurdle rates – or minimum returns they must surpass before paying themselves performance fees – and that carry is typically paid yearly. Private equity funds, by contrast, pay themselves carry upon the exit of investments and then typically after a “distribution waterfall” has made preferred return payments to limited partners.

Rubenstein indicated that he was not troubled by the participation of hedge funds in the private equity market – the two broad asset classes will increasingly merge, he said. “In ten years, there won’t be private equity funds and there won’t be hedge funds,” Rubenstein said. “There will be blended pools of capital called alternative investment funds.”

The Yale private equity conference also featured a speech by Nigel Doughty, co-founder and CEO of London-based private equity firm Doughty Hanson.