Predicting the next big hedge fund IPO
Now that Fortress has opened up to the public, what fund will be next to try its hand at an IPO? Fortune's Paul Fruchbom reports.
(Fortune Magazine) -- On the night before Fortress Investment Group became the first hedge fund to trade on the New York Stock Exchange, Wesley Edens and the other four principals celebrated in a manner that befits the firm's intentionally low-key profile. They gathered at a bar on the Upper West Side of Manhattan.
By the next day's closing bell, though, Edens could afford more than just beer and pretzels: His shares from the IPO were worth approximately $2.3 billion. Six weeks later, on March 22, Blackstone Group followed suit when the private-equity shop revealed plans to raise $4 billion in an upcoming IPO.
Since that news broke, Wall Street has been buzzing about who will be the next firm to announce plans for an IPO and invite the public into a world once reserved for high-net-worth individuals and institutional investors.
Fortune has learned that Avenue Capital, Perry Capital and the Citadel Investment Group are leading contenders among hedge funds. These firms are some of the largest funds in the U.S., each controlling more than $10 billion in assets, and Avenue and Perry have recently diversified into private equity and real estate, providing the growth profile prized by public investors.
"If you parse through the hundreds of private-equity firms and hedge funds that could theoretically go public, only a handful have all the characteristics to do so successfully," says Stuart Bernstein, a managing director in the financing group at Goldman Sachs, which led the Fortress IPO.
Avenue Capital's founder Marc Lasry has been open about his intentions to take the company public, according to an investment banker who covers the fund. A distressed-investment specialist, Lasry is best known for making a killing in Asian markets following the debt crisis of the late 1990s.
Last year the $12 billion hedge fund sold a 20 percent stake to Morgan Stanley (Charts), a move the banker described as the "first step before going to an IPO." Outside the office he has been a prominent donor to the Clintons, and Chelsea Clinton joined the firm last year. (Avenue Capital declined to comment for this story.)
Perry Capital, which runs $11 billion in assets, is another likely candidate, according to investment banking and hedge fund sources. While the fund once played its cards close to the vest, founder Richard Perry has recently been involved in several high-profile deals - backing Hollywood moguls Harvey and Bob Weinstein in their new movie studio and helping finance the takeover of English soccer club Manchester United by Tampa Bay Buccaneers owner Malcolm Glazer.
Perry's wife, Lisa, a fashion designer, is also a prominent Democratic Party donor who has hosted fundraising events for Hillary Clinton at the couple's Sutton Place pad and Sag Harbor house. (Calls to Perry Capital were not returned.)
Finally, there's Citadel, the $13 billion Chicago-based hedge fund led by 38-year-old Ken Griffin. Last year Citadel became the first hedge fund to issue publicly traded bonds, proving its ability to withstand investor scrutiny.
Being comfortable in the limelight may be what finally determines who does and doesn't go public. D.E. Shaw and Renaissance Technologies have been rumored as candidates, but each hedge fund is run by a publicity-shy academic.
"No way," says one banker of Renaissance and D.E. Shaw's IPO chances. "When you cut through everything, that is probably the deciding factor: Are the founders comfortable living under heavy public scrutiny?"
So how has Fortress (Charts) stock done post-IPO? Its shares have recently retreated from $37 to the mid-$20s - fueling criticism that the founders cashed out at the top of the market. Fortress partisans counter that the principals still own almost 80 percent of the company, and similar arguments were heard when Goldman Sachs (Charts) went public in 1999; today the investment bank's stock has more than tripled, to almost $200 per share.
Buying Fortress, fronted by Wesley Edens (left), is a different play from buying into Steven Schwarzman's Blackstone. The former is a red-hot hedge fund whose board will have a majority of independent directors; the latter is a venerable private-equity shop with a larger asset base but much less public oversight.
From the April 16, 2007 issue