Hedge fund magnate Steve Cohen is now dabbling in private equity.
In a somewhat surprising move, Cohen's $12 billion SAC Capital Partners behemoth is stepping up to the plate to help finance a $3.1 billion management-led buyout of
. The Connecticut-based hedge fund is part of a group of investors taking the higher education company private in a deal led by Laureate CEO Douglas Becker, Kohlberg Kravis Roberts and
private equity arm.
There's nothing surprising in finding a private equity giant such as KKR heading up another leveraged buyout. But it's not every day that Steve Cohen gets involved in an LBO.
A spokesman for SAC declined to comment on the deal, which includes the assumption of $700 million in debt. But people familiar with the hedge fund say this is the first significant LBO involving SAC.
In the deal, the buyout group is proposing to pay $60.50 a share for Laureate, which represents a 23% percent premium to the stock's closing price on Jan. 4. That was the day before the company's board began negotiating a deal with its CEO and the buyout group. The deal is also being financed with debt provided by Citigroup and
It's not clear if the Laureate deal, which also includes several small hedge funds, marks a shift in investment strategy for Cohen and SAC. It's possible that Cohen is sinking money into Laureate simply because he sees it as a good investment.
As of the end of September, SAC had a small equity position in Laureate, owning less than 50,000 shares.
Over the years, SAC has been one of Wall Street's most successful hedge funds, making Cohen a very wealthy man. In 2006, the fund posted a 34% return, one of the best performances for any hedge fund.
SAC made its mark on Wall Street by employing dozens of fast-money traders who didn't hold onto positions for long. But in more recent years, SAC has taken big positions in companies and agitated for change, such as buybacks, dividends or corporate buyouts.
Then again, there's some logic to big hedge funds like SAC getting involved in private equity deals. The market for LBOs is on fire, and private equity firms have been scoring big profits by taking companies private and then unloading them a year or two later in an IPO or a subsequent sale.
Buyout firms in the U.S. are flush with cash after raising more than $200 billion last year from institutional investors seeking higher yielding returns. Last year, private equity firms, on average, posted returns in excess of 25%, according to Mercer Investment Consulting.
By contrast, hedge fund returns have lagged behind of late. Last year was marked by a number of big hedge fund blowups, including the collapse of Amaranth Advisors, once a $6 billion fund. Many players in the $1 trillion hedge fund industry have found it difficult to substantially outperform the major market indexes.
In 2006, the Credit Suisse/Tremont Hedge Fund Index rose a little under 14%, just slightly better than the 13.6% gain in the S&P 500.
A recent study by the Spectrem Group, a consulting firm, found that wealthy Americans reduced their exposure to hedge funds in 2006. Indeed, one former hedge fund manager who declined to be identified says he pulled money out of many of the funds he was invested in because he's been dissatisfied with returns they've generated.
Cohen's SAC, of course, wasn't one of the hedge funds suffering from poor performance last year. But with private equity firms grabbing all the headlines and fat fees these days, a savvy manager like Cohen may not want to be left on the outside looking in.