Stealth Capital

Hedge funds are investing in growth companies with great success. The trick is finding one.

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Financing Growth

Hedge funds are now investing in growth companies. Since the funds are forbidden by law from marketing, the trick is finding one

For a long time, Carver Corp., based in Lynnwood, Wash., was a company with one great asset and a lot of problems. The asset was a reputation for making top-of-the-line home-entertainment products, such as amplifiers. The problems were far too numerous to list. Carver had done little except lose money for 15 years.

Could Carver be saved? After a grueling overhaul of the $18-million company, there are now signs of hope. A newly focused product line is receiving good reviews, and profitability seems within reach by year-end. The key: a turnaround strategy that has gained strength from a partnership with Renwick Capital Management, a hot young hedge fund based in New York City. Renwick is providing Carver with a potent combination of cash, contacts, and turnaround expertise.

If you haven't heard of hedge funds like Renwick Capital, you're hardly alone. Because hedge funds are private investment pools that are forbidden by law from advertising themselves, they have attracted less attention than other sources of growth capital have. But despite their low profile, hedge funds have become a financing source for an increasing number of entrepreneurial ventures. Lee Hennessee, who produces a proprietary database that tracks 1,400 hedge funds, reports that "by 1994, as much as 20% of the assets of some of the largest and most well-known hedge funds were invested in what we consider 'illiquid' investments, which include privately held companies and turnarounds." Hennessee, a New York City­based financial adviser, speculates that as many as 3,000 hedge funds may be currently in operation--although there is no comprehensive source of information about many of their activities. However, it's safe to say that hedge funds today are starting to dabble in entrepreneurial companies--both publicly traded ones, like Carver, and privately held ones.

These days hedge funds don't have to have anything to do with hedging. The name comes from a time when the funds were involved in various stock-market activities that hedge against market fluctuations. "The best way to describe them is as private, unregistered investment companies, which, until recently, were limited to no more than 100 investors," explains Pamela Wilson, a senior partner at Boston law firm Hale and Dorr. (Recent changes permit more than 100 investors, as long as they all meet certain set standards of wealth and sophistication.) The fund's managing partners can structure investments in a number of ways.

Entrepreneurs in search of capital should keep in mind that hedge-fund investors are wealthy--funds typically contain $20 million to $100 million or more--and thrive on the same kind of risks and rewards that attract venture capitalists and the very largest of angel investors. As Wilson notes, hedge funds are not limited to specific kinds of investments. "Some funds get involved with fast-growing companies or those in need of a turnaround," she explains.

How should business owners search for potential hedge-fund investors? It's no easy task, obviously. Investments typically happen the way Carver's did: Raj Bhatia and James McCullough, the hedge fund's managing partners, made the initial approach. Still, you can increase your company's chances of appearing on a hedge fund's investment radar by visiting investment forums and venture-capital fairs, approaching investment-banking firms with a strong interest in your industry, and networking with well-connected bankers and lawyers.

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