"Reverse Merger" Will Make Europe's GLG Hedge Fund Firm a Public Company

GLG Partners, one of the largest hedge funds in the European market, will go public in the United States in a “reverse merger” valued at $3.4 billion.

The deal is the latest in a series of major buyouts and stock offerings that could be an advance signal that the market for alternative investments is starting to play itself out.

Alternative investments include private-equity, venture-capital and hedge-fund firms. They’re all similar in that they try and do financial deals that provide their investors with returns that far exceed those provided by the typical stock-market investments. Investors include institutions, such as insurance companies and pension funds, as well as wealthy individuals who must meet stringent requirements prior to participating. This has been one of the hottest slices of the investing market for several years.

Yesterday’s announcement about the GLG Partners deal follows Friday’s debut of the much-heralded Blackstone Group as a public company. Blackstone (NYSE: BX) saw its shares soar on Friday – in spite of a broad market decline – although they declined 7.5% yesterday.

Rather than undergoing an initial public offering, or IPO, GLG Partners will merge with an already-existing public company, the Delaware-based Freedom Acquisition Holdings, the two firms announced yesterday.

By transforming itself into an NYSE-listed public company, the London-based GLG says it gets better access to the United States, its financial markets, and its wealthy investors – the latter of which are drawn to the high reported returns and strong social cachet that hedge-fund investments carry.

GLG was founded in 1995 as a unit of the Lehman Brothers brokerage house, and gained its independence five years later. It is not well known in the U.S. market, experts say.

Freedom is technically known as a “special-purpose acquisition company,” although Wall Street shorthand refers to it as either a “shell company,” or a “blank-check operation.” It’s a publicly traded corporation that has no operations of its own, but was formed to take over other companies – a process known to Wall Street as a “reverse merger,” and one that enables firms such as GLG to avoid the time, cost and reviews mandated by the IPO process.

Freedom was founded a year ago. When finished, the hedge fund will trade on the NYSE under the symbol GLG. The principals hope to have the deal finalized by the end of this year.

When that happens, GLG will join Blackstone and several other companies that have sold off pieces this year, raising capital and enabling insiders to sell off some of their holdings. The deals took various forms.

Fortress Investment Group went public via an IPO in February. Oaktree Capital Management LLC – one of the firms that bought Formica for $175 million, fixed it and then sold it for $700 million in a deal announced last month – raised $700 million in a private-placement deal managed by Goldman Sachs.

It’s an old investment adage that when insiders start cashing out, a market top may be at hand.

Some of the trends at least hint at a market peak.

Fundraising by private-equity funds slowed substantially in the fourth quarter of 2006, but still broke records for the year, according to a report by Thomson Financial and the National Venture Capital Association (NVCA).

In that 2006 final quarter, 37 venture capital funds raised a total of $2.83 billion – and 39 Buyout and Mezzanine funds raised $17.83 billion. Despite this slower pace, venture capital saw the highest fundraising year since 2001, with 200 funds raising $28.5 billion. Buyout and Mezzanine funds recorded the highest year ever with 138 funds raising $102.9 billion.

An investment company operated by the Dubai government is investing in GLG. A similar unit of China’s government invested in Blackstone before its IPO.