Billionaire hedge fund founder Leon Cooperman just called private equity a 'scam'

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Billionaire hedge fund founder Leon Cooperman just called private equity a 'scam'

Leon Cooperman

Reuters/ Rick Wilking

Leon Cooperman is transitioning his hedge fund, Omega Advisors, into a family office.

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  • Omega Advisors founder Leon Cooperman told attendees at an Alternative Investment Roundtable event in New York that now is not the time to invest in private equity.
  • Cooperman, who is transitioning his hedge fund into a family office, said there are several headwinds for private equity, including an expectation for increased interest rates when many PE firms would need to sell out of their investments.
  • That comes as some big hedge funds have been making more PE-like investments, and the two industries battle each other for talent.
  • Click here for more BI Prime stories.

The latest shot fired in the battle between hedge funds and private equity comes from a billionaire stock-picker who represents the old guard of the hedge fund industry.

Omega Advisors founder and billionaire Leon Cooperman told attendees at an event in midtown Manhattan he thinks private equity as it currently operates is a "scam."

"They're getting very fancy fees for sitting on your money," Cooperman said at the Penn Club. PE firms have been raising massive funds and have amassed hundreds of billions of dollars in so-called dry powder that has yet to be deployed into investments.

Hedge fund performance, meanwhile, has also been under scrutiny thanks to the high fees typical of the space. Last year, the average hedge fund lost money, and the market has outpaced the average fund in 2019, according to Hedge Fund Research.

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And the line between private equity and hedge funds has been getting more blurred. Some of Cooperman's hedge fund brethren have been increasingly creeping into the private equity space, with firms like Viking, Tiger Global, Point72, and more, investing in private markets and fighting PE firms for talent.

Large institutional investors - hedge funds' biggest clients - have also been pumping money into private equity, which has raised close to $432 billion in assets in 2018, with a large chunk of money that still hasn't been put to work.

Cooperman, who made his money as a value investor in the public stock market, said he believes the market is "fully valued," making any deal expensive.

He noted that many deals being executed today have low-interest rates for borrowing money - something he doesn't expect to be the case when private equity needs to sell out of their investments in 7 to 10 years - as well as the fact the game is more crowded now.

"It's no longer an undiscovered concept," he said.

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See more: The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.

According to Cooperman, who is transitioning his hedge fund into a family office, private equity returns have been "aided and abetted" by the low-interest rate environment that has followed the housing crisis. Without rates this low, he said, private equity returns will not be the same.

Low interest rates have "made the exit multiple much higher than the entrance multiple," he said, especially for large deals.

When a member of the audience, who said they worked at a private equity firm, pushed back on Cooperman's outlook, he said that some smaller deals can still make sense, but the current projection for interest rates does not make large-scale deals a good bet. Many of those big deals, he said, ultimately enrich executives at the firm.

"I think leveraged buyouts to a degree are a giant case of insider trading," he said, referencing examples of public companies that then become private.

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See more: We talked to 7 insiders about the $27 billion Refinitiv-LSE deal. Here's how one of the biggest data deals of the year came together.

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