Gamma Finance, a specialist in alternative investments, is reporting growing demand, mainly from private equity investors and real asset specialists, for stakes held by hedge funds which have become illiquid.
This is creating a secondary market for the private equity sector and useful source of finance for cash-strapped hedge funds. Gamma Finance founder Florian de Sigy said that before the financial crisis, a number of credit hedge funds lent money to business via private loans or asset-based lending. These loans were secured against real assets, equity or future cash flows. In the financial crisis, many of the borrowers defaulted on the loans and hedge funds took delivery of the collateral. De Sigy added: “Many of these borrower companies have subsequently been able to restructure and recover, but find that they are now partially owned, or controlled, by the hedge fund that originally lent them money as a way of creating a steady income.”
On the positive side, this is now providing assets for private equity investors and a source of capital for hedge funds which can help meet investor redemptions, as well as for the underlying companies. This new market is also attracting institutional investors. “Specialist investors have acquired meaningful secondary market positions, creating dedicated portfolios of illiquid hedge funds of $250 million – $500 million, often backed by long-term institutional investors who saw the potential for real yield creation,” said de Sigy.