Red Flag Over Greenlight Re

The reinsurance IPO shares an adviser with a huge hedge fund.
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Hedge fund manager David Einhorn has found an intriguing way to tap into Wall Street's sudden interest in hedge fund IPOs.

Earlier this week, Greenlight Capital Re, a small reinsurer backed by Einhorn, filed for a $175 million initial public offering. But the Cayman Islands-based firm isn't much of a reinsurer. The two-year-old company didn't even begin underwriting policies until last April.

In fact, most of the $39.6 million in profit Greenlight Re generated last year came from its investment activities. And those investments were managed by DME Advisors -- the very same investment adviser that manages Einhorn's $4 billion Greenlight Capital hedge fund empire.

In essence, Greenlight Re looks a bit like a slimmed-down version of Einhorn's Greenlight Capital hedge fund. An investor who buys a share of the reinsurer is really banking on Einhorn's advisory firm making the same kind of shrewd investments it does for the hedge fund.

On the surface, this sounds like an appealing situation. A Greenlight Re investor gets to invest in a hedge fund without needing a million dollars in the bank.

But the real winner in the Greenlight Re IPO is Einhorn.

The 38-year-old hedge fund manager is largest owner of the reinsurer's Class B shares, which have greater voting power than the Class A shares that Greenlight Re intends to sell to investors. And after the IPO, Einhorn will be entitled to buy even more Class B shares, further solidifying his control.

Better yet, DME Advisors, the investment advisory firm Einhorn controls, stands to rake in some hefty fees for managing Greenlight Re's money. Over the first nine months of 2006, DME Advisors took in $13.1 million in management and performance fees. In the coming years, those fees are likely to go up, especially if Greenlight Re uses some of the proceeds from the IPO to fund its investment activities.

It seems Einhorn has found a way to monetize Greenlight Capital without actually opening his hedge funds' books to public inspection. It's a clever twist on the more direct approach taken by Fortress Investment Group, a $26 billion hedge fund and private equity firm that is selling shares directly to the public. Fortress hopes to raise $750 million in its IPO.

The irony, of course, is that Einhorn has made a career out of betting against companies whose management practices he questions, such as

Allied Capital


. Einhorn has been a vocal critic of the accounting practices employed by the Washington, D.C.-based business development company.

Now in theory, there's nothing wrong with Greenlight Re employing Einhorn's advisory firm. But the relationship could pose a potential conflict of interest down the road, and the reinsurer could come out on the short end of a trade involving the hedge fund.

"If we compete for any investment opportunity with another entity that DME Advisors or its affiliates manage, DME Advisors is not required to afford us any exclusivity or priority," the filing says. "For instance, Mr. Einhorn is the president of Greenlight Capital Inc. Greenlight Capital Inc.'s interest and those of DME Advisors may at times conflict, possibly to DME Advisors' detriment, which may potentially adversely affect our investment opportunities and returns."

Einhorn, through a spokeswoman, declined to comment.

Don't be surprised if other hedge fund managers find unusual ways to tap into the public's fascination with their industry.