Hedge fund D.E. Shaw stepping up buyout activities Reuters, 5/26/2005 By Dane Hamilton NEW YORK, May 26 (Reuters) - D.E. Shaw & Co., one of the world's largest hedge fund managers, is stepping up its buyout activities in a move that could create new competition for traditional leveraged buyout firms. The $15 billion firm aims to be "much more active" in acquiring whole companies and holding them for years, a person familiar with the firm's plans said this week. The move is a further diversification for D.E. Shaw, founded in 1988 by David Shaw, a Columbia University computer science professor turned Morgan Stanley analytical trading guru. The secretive firm is known for generating top-tier returns using quantitative analysis and modeling, notwithstanding an industry downturn in recent months. D.E. Shaw, which actively trades distressed debt, equity, currency, energy and a range of other securities, has already purchased three companies, including legendary toy retailer FAO Schwarz, former Internet high-flyer eToys Inc. and Sure Fit Inc., a maker of slip covers for couches. All three companies were sold after seeking Chapter 11 bankruptcy protection. It is unclear whether New York-based D.E. Shaw is raising a new buyout fund or will use its existing investment banking relationships to fund the new buyout efforts. D.E. Shaw declined to comment. D.E. Shaw's moves will expand its investment activities in "alternative assets," a broad term that includes buyout, venture, hedge, real estate and other assets that are less liquid than stocks and bonds. D.E. Shaw, like other hedge funds including Cerberus Capital Management and Silver Point Capital, is also expanding its lending activities to mid-sized companies through its Laminar Direct Capital division. The moves reflect an increased blurring of the lines between traditional buyout firms -- which typically use a combination of debt and equity to buy, fix and sell companies over a period of years -- and hedge funds, which employ shorter term trading strategies. In recent months, buyout executives including Henry Kravis, co-founder of Kohlberg Kravis Roberts & Co., have criticized hedge funds for expanding into buyouts, claiming they generally don't have the skills to build companies over the long term. But other buyout firms are adapting to the new competition by expanding hedge fund activities, reasoning that the expertise they accumulate from due diligence on companies can be handy for shorter-term trading strategies. Texas Pacific Group, for instance, formed the $2.8 billion TPG-Axon this year with former Goldman Sachs senior partner Dinakar Singh. And Carlyle Group recently announced plans to set up a hedge fund of undisclosed size, further diversifying an investment group with some 28 different funds. "There is an increasing convergence of buyout and hedge funds," said Loren Boston, managing director in Merrill Lynch's private equity group, which raises money for funds. But, said Boston, hedge fund managers may be held back by a lack of "operating expertise" to build companies. One recent hedge fund aiming to address that issue is former Goldman Sachs senior trader Eric Mindich, who recently raised $3.5 billion for his Eton Park Capital Partners hedge fund. Mindich is in the market to hire experienced buyout pros to manage buyout operations for the fund, which could employ about a third of its capital, sources said. An Eton Park spokeswoman declined to comment. Close Window