How a Hedge Fund Became one of the World’s Largest Retailers 1. Describe recent trends in the hedge fund and private equity industry and the growing overlapbetween the two. A: Hedge funds, historically, were more interested in the buying and short selling of defaulted ornear-default bonds within a few weeks or months. This strategy was more of a short-term, exit-focused strategy. Now, however, some hedge funds are becoming more interested in therestructuring and long-term controlling of attractive assets. Hedge funds’ stakes in thesecompanies are then transformed into equity from the arising new entity. Private equity is split up intoVenture Capital and Leveraged Buyout funds, with a little made up of mezzanine funds. LBOcompanies buy publicly traded companies that are experiencing inefficiencies from costly regulationof being publicly traded and the incentives of managers and shareholders. The growing overlap iscorrelated between the LBO side of private equity and the more recent trend in hedge funds ofacquiring large stakes in mature, failing companies in order to have a longer-term return .2. Analyze different issues surrounding a purchase by a financial or strategic buyer and theirrespective strengths and weaknesses.
A: Financial buyers, like Warren Buffett for example, have the cash readily available in the instanceof a company’s bankruptcy. Because the funds are readily available early on, usually financialbuyers found themselves able to acquire distressed assets and/or companies at the most attractiveprices. A drawback or weakness associated with financial buyers is the lack of expertise or evenflexibility, as is the case for mutual fund managers or pension plans. Strategic buyers, on the otherhand, are able to create synergies through buying out distressed assets or companies if they havethe cash readily available. This is usually not the case, and what ends up happening is that financialbuyers get the bid first and steal the prize.
3. Provide a brief historical background of the problems facing Kmart and the characteristics of thedistressed debt market, including factors that influence an investment in a distressed company. A: Kmart was, in the late 1970s, much larger than the famous superstore giant called “Wal-mart”with sales 20x that of Wal-mart’s and roughly 850 more stores nationwide. However, Kmart’s salesstayed consistently stagnant, while Wal-mart became the giant it is now.