NEW YORK -- In the wake of Fortress Investment Group LLC's (NYSE: FIG) successful initial public offering, more hedge funds are likely to go public this year, according to investment bankers speaking at an industry conference last week.
The desire for equity-based rewards to attract and retain talent in a competitive industry environment is a key force behind the increased interest in IPOs. Bankers say that many of their hedge-fund clients are looking at the possibility of going public.
Souren Ouzounian, managing director in investment bank at Merrill Lynch & Co. (NYSE: MER), said he has about six hedge-fund clients that are mulling IPOs. Michael Rees, a Lehman Brothers Holdings Inc. (NYSE: LEH) investment banker, said four of his clients are positioned to file in "the fairly near term."
"They're big firms," Rees said at the Hedge Fund Leadership Forum in New York.
The interest in going public comes after New York-based Fortress' stock debut drew strong interest from investors. Another hedge-fund firm, Oaktree Capital Management LLC, sold shares in its management company in a private placement this week. The IPO of Blackstone Group, a New York private-equity firm, is also expected to attract heavy investor interest this summer.
In addition to wanting to use equity to lure talent, hedge funds also hope to be able to use capital raised in their IPOs for deal making. There's also a fear of being left behind as rivals go public.
"They don't want to wake up in 12 to 18 months and have 75 percent of their competitors have access to a public currency to retain and attract talent that they don't have," Rees said.
But skeptics contend that the IPO trend largely reflects some fund managers' desire to cash out at the top of the market.
"There's no clear use for the money," said Harry Krensky, principal at Atlas Discovery Capital, in White Plains. "The only use of the money I can see is to cash out management."
Aside from traditional IPOs, an increasing number of hedge funds are looking to sell minority stakes in themselves to other investors. Bankers said that institutions ranging from overseas governments to insurance companies to private-equity firms are all in the market to buy positions in hedge funds.
"We're seeing a lot more activity, a lot more tires being kicked," Rees said.
Bankers also said that hedge funds are likely to increasingly turn to debt as well as equity markets in coming months.