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Capital Markets

Hedge funds drive equity new issues

Hedge funds are suddenly receiving high allocations in IPOs even though their participation can sometimes reduce issuers' proceeds. Are they suitable buyers or are investment banks favouring the clients which pay them the most?

WHEN NORWEGIAN DIRECTORY company Findexa was planning its innovative high-yield IPO in May 2004, it expected as much as 50% of demand to come from high-net-worth individuals, private clients and retail investors. But when this demand failed to materialize it wasn't long-only investors that filled the gap but hedge funds. Half of the IPO went to hedge funds and just 30% to long-only accounts.

Hedge funds are now rivalling if not eclipsing traditional fund managers as the main buyers of new equity issues. Hedge funds have long been the main buyers of new equity-linked and accelerated deals: it now looks as if their presence as substantial investors in IPOs is here to stay. Their rise is changing the equity new-issue dynamic.

Investment bank underwriters had little choice but to turn to hedge funds to complete what few primary equity capital market deals there were between the collapse of the dotcom bubble and the return of the IPO market in the third quarter of 2003. Long-only investors stayed well clear of the primary market. Although they have since returned, hedge fund allocations in IPOs have settled at an average of anywhere between 20% and 50% according to syndicate bankers – substantially higher than in times of comparable IPO activity.

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