Take the recent transaction involving Chinese property firm, Skyfame Realty. The $200 million convertible bond saw Merrill Lynch lead the deal and also buy $70 million of the bonds. It syndicated the remainder to six hedge funds. Merrill, alongside the hedge funds, evidently took a very strong view on SkyfameÆs credit and equity story. The result: instead of just being paid an increasingly commoditised fee for lead managing the convertible, the US firm has the opportunity to realise a much higher investment gain down the road.
In this case, Merrill is co-investing with the six hedge funds in what might be termed a special situation. The deal will fund SkyfameÆs growth û allowing the acquisition of a five-star hotel in Guangzhou operated by the Westin. Indeed, the special (and non-vanilla) nature of this CB is reflected in the fact that the size of the deal was bigger than the companyÆs existing market capitalisation.
æSyndicated investingÆ has grown out of such non-vanilla situations. It is about sophisticated investment banks putting their money to work alongside sophisticated hedge funds û with transformational consequences for companies like Skyfame.
Merrill has become one of the more visible players in the syndicated investing space. But it is by no means alone. Goldman Sachs, Credit Suisse, and JPMorgan are very active. So too is Deutsche Bank which has about 50 staff working in the area û split between its credit trading team and its complex equity group. Morgan Stanley is a more recent entry, and has just hired a team of five bankers to focus on it.
What makes syndicated investing unique is the collaborative relationship it creates between the investment bank and its hedge fund clients. The latter bring the capital, as well as the ability to purchase complex hybrid structures that combine a credit view with some equity upside. The investment banks bring the ability to source deals, do the due diligence and syndicate the risk to other hedge funds. And by taking a portion of the deal, the banks put their own æskin in the gameÆ, giving an added comfort level that the investee company is a good one.
There is hence a very neat alignment of interests. ôWe are partners with the hedge funds,ö says Damian Chunilal, Merrill LynchÆs head of Pacific rim origination. ôWe are working collaboratively with the hedge funds.ö
Teall Edds is a portfolio manager with Stark Investments, one of the biggest hedge fund players in the syndicated investing area. ôThis is a relatively new asset class, and every deal is unique,ö says Edds. ôI joined Stark at the end of 2003 when there were few hedge funds in the region and most of this stuff wouldnÆt have been considered for syndication by bankers. It is definitely a trend that is here to stay.ö
Investment bankers agree. ôThe volume of these deals has accelerated û both in size, number and countryö says David Ryan, GoldmanÆs financing group head in Asia ex-Japan. ôMost of what is done is privately placed, so it is difficult to quantify by how much it is growing with precision. But it is growing rather quickly.ö
ôIt is a growing trend,ö agrees Achintya Mangla, head of equity-linked and corporate derivative origination at JPMorgan. ôWe are currently looking at 10 opportunities.ö
ôAnecdotally, we believe private investments by hedge funds and investment banks in Asia are four times the size of what traditional private equity funds have deployed in Asia,ö says Tom Cheung, Deutsche BankÆs co-head of complex equity.
Edds of Stark estimates there could be $3 billion of æsyndicated investingÆ deal volume this year, versus ôalmost zeroö as recently as 2003.
ôThis business has been driven by the growth in Asia of hedge fund money,ö says Credit SuisseÆs Lars Sorensen, a managing director in the global structuring group, ôThe region has witnessed an avalanche of hedge fund money, and it has really only happened in the last couple of years. That money is being directed into these types of structures.ö
ôThe business has grown as hedge fund activity in the region has grown,ö concurs DeutscheÆs Cheung. Apart from Stark, the major hedge fund buyers of these products include the likes of Citadel, Oasis, Ochziff and Farallon.
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