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KKR founder warns of hedge fund invasion

Henry Kravis, co-founder of US buy-out house Kohlberg Kravis Roberts (KKR), has warned the private equity world that cash rich hedge funds are invading the world of leveraged buy-outs. Speaking at a recent conference in New York, he also suggested that hedge funds might not have the skills required to execute these transactions successfully.

'Too many people with no experience in building companies have access to money,' Kravis said. 'Experience does matter.'

Hedge funds have long operated at the edges of the buy-out world, most often as short-term lenders in debt-backed buy-outs. But recently many have made forays into an area typically dominated by private equity firms.

In July, for example, a consortium of hedge funds made a rival offer for Texas Genco, an electrical generating arm of CenterPoint Energy, against a group of four private equity firms including KKR. Genco was eventually acquired for $3.65bn by the buy-out group, which also included Blackstone, Texas Pacific and Hellman & Friedman. But the encroachment of these hedge funds on what was considered to be private equity territory raised concerns among buy-out executives about increased competition in an already overcrowded industry.

Hedge fund assets have swelled to an estimated $866bn to date in 2004, up from $167bn a decade ago, according to a report by Reuters. This dramatic increase is putting pressure on these funds to execute new strategies including buy-out transactions. Providence Equity's Jonathon Nelson noted that if hedge funds put only ten per cent of their assets into buy-out strategies, it would more than double the amount of money going into private equity to $160bn.

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