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This article from Matthew Judd of Clifford Chance LLP is also published on ILFR.com: Over the last year or so there has been a raft of cases of hedge funds bidding in the larger-cap private equity market. To date, most deals have taken place in the US, and high profile examples include Cerberus Capital Management leading a consortium of hedge funds in the auction for Texas Genco, and Cerberus’s $5.5 billion offer for Toys ‘R’ Us, both bids losing out to a consortium of private equity funds - although Cerberus was successful in its $2.3 billion buyout of MeadWestvaco. In Europe, Fortress bought out German housing group Gagfah for $3.5 billion and Perry Capital has offered to acquire Drax Group, owner of Europe’s largest coal-fired power station. We have also seen the first UK M&A transactions to be led by hedge funds: the acquisition of WestLB’s interests in TV rental company Boxclever by Cerberus and Fortress, the bid for Peacock by Perry Capital and Och Ziff and the involvement of hedge funds in the bid for Manchester United.

Of the estimated 8,000 hedge funds worldwide, around 20 are reported to be contesting in the $1 billion-plus enterprise value buyout-market. With a number of these having over $10 billion in capital to deploy, they represent both a fertile alternative source of financing for companies and a serious threat to the traditional pastures of the private equity houses.

This article will examine some of the reasons for hedge funds infiltrating private......................

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