Funds query 'club deals'

US public pension funds are concerned at a sharp rise in the number of takeovers by teams of rival private equity firms, arguing that such "club deals" increase risks for investors and reduce their ability to hedge their bets.

Their fears are a sign that investors are beginning to question some of the practices fostered by the recent private equity boom and are preparing for a fall in the number of successful deals and levels of returns generated by buyout funds.

State pension funds' large cash resources, and their need to gain large returns to pay for future retirement plans, have been a big driver of the rise in deals and fundraising by private equity firms. In 2005 public pension funds had nearly $100 billion (€78.18 billion) invested in private equity, up from $26 billion a decade ago, according to Russell Investment Group.

However, several public pension fund managers expressed concern at the recent spread of club deals, such as last month's $33 billion takeover of hospital operator HCA by Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch's private equity arm - the largest buyout yet.

They argue that private equity groups' decisions to team up for blockbuster deals undermine fund managers' strategies of investing in several buyout funds in an effort to reduce risk and diversify their portfolios.

Deals involving consortia of buyout funds total about $265 billion so far this year and account for more than 70 per cent of the value of all private equity take-overs, compared with less than half that for the whole of 2005, according to Thomson Financial.

"We are not in love with [ club deals]," said Peter Gilbert, chief investment officer at the Pennsylvania State Employees' Retirement System, which has more than $3.6 billion invested in 152 funds run by private equity firms.

Industry observers say club deals have proliferated recently because attractive takeover targets are scarce and buyout funds are under pressure to invest the $14-billion-plus raised this year.

Private equity firms like them because they can buy companies too big to be taken over by a single fund. Executives say investors benefit because consortia can outbid the competition.

But Joe Dear, executive director of Washington State Investment Board, whose $70 billion fund is one of the biggest public investors in private equity, said: "This is an issue of additional concentration of risk. So far, there hasn't been a deal with a concentration of risk that would cause alarm but we are watching that."