Monday, February 12, 2007

Fortress flotation 'insane and ridiculous' demand for shares

Fortress Investment Group became the first US hedge fund and private equity group to go public on Friday. The shares soared 89% on the first day and the issue was 25 times oversubscribed. The company floated with a market capitalisation of over $7bn, but with the share price nearly doubling on the first day the company is valued at over $13bn.

The anticipation of the float brought investors flocking to the issue with the FT quoting a source saying that demand was 'insane and ridiculous'. Many alternative asset managers and hedge funds will be watching the progress of the company as a public entity very closely and we are likely to see further action in the sector.

The FT says "While Fortress will be the first US hedge fund manager to list, bankers expect other alternative asset managers to follow. Several US private equity managers, including Blackstone and KKR and the Carlyle Group, are thought to be watching the Fortress float. So too is Citadel Investments, the Chicago-based hedge fund manager with about $12bn under management, which late last year raised $500m from a bond issue".

Fortress has about $30bn under management with $17bn in private equity $9bn in hedge funds and the rest in real estate and related debt.

Investment in the hedge fund sector is restricted to all but the wealthiest investors, with the US lawmakers attempting to raise the bar to a minimum of $2.5mn.

Our opinion is that there is an obvious demand for hedge funds as a product in the 'lower' investment end of the market and floatation’s like this give those investors an opportunity to participate through direct investment in the shares of the company.

We are watching this sector very closely, as we believe that there may be a strategy of picking up the shares of each float on the first day for a short term trade at least. Obviously these companies are clearly very risky ventures which is why regulators are seeking to limit private investment directly in the funds, but while the mystique surrounds the operation of hedge funds and the stories of stellar returns keep hitting the headlines we believe there will be a large appetite for investors in the shares of these companies at least in the short term.

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