IN FEBRUARY, HIGHFIELDS Capital Management's $3.25 billion bid for electronics retailer Circuit City Stores and Cerberus Capital Management's $5.5 billion attempt on Toys 'R' Us sent shockwaves through the private-equity community.
Although the bids of both of the hedge funds ultimately failed, many in the business interpreted them as proof that hedge funds are now seeking to conquer the larger-cap private-equity market.
The first big deals started appearing last year. In July, a hedge fund consortium lost out to private-equity firms in a $3.65 billion bid war for US power generator Texas Genco. A rash of high-profile takeover attempts has ensued – some of which, such as Cerberus's $2.3 billion buyout of MeadWestvaco this year – have been successful.
Industry experts estimate that about 20 hedge funds are considering entry to the $1 billion-plus enterprise-value buyout market. "Hedge funds have purchased debt of distressed companies and invested in preferred stock of small corporates in the past. But in the last six months some have moved into the $1 billion-plus buyout space," says Fred Wakeman, director at Advent International. "For private-equity houses, this is an unwelcome development."