Hedge fund trio takes Pegasus private

Prides Capital has led a group of hedge funds to take travel services group Pegasus Solutions private, providing further evidence of the hedge-fund incursion into private equity.

Prides Capital Partners has teamed up with Tudor Investment Corp. and Belfer Management to take Dallas-based Pegasus Solutions private. The $275 million (€229 million) transaction, expected to close by the first half of next year, serves as more proof that the hedge funds are moving into an area that has historically been the exclusive domain of private equity groups.

Pegasus is a third-party provider of marketing and reservations services to the hotel and travel industries. Prides, based in Boston and San Francisco, is investing $45 million of equity into the deal, while Tudor and Belfer will invest a combined $95 million. JPMorgan is leading the debt financing, which will make up roughly $120 million of the purchase price, and existing investors will cover the balance through rolling over their holdings into the new deal.

We have the staff to do these investments. We’ve got a very deep team, with public equity, private equity, consulting, investment banking and high yield experience.

Hank Lawlor, COO, Prides Capital

Much has been made about the hedge fund push into private equity, although, until now, most of the action has been confined to the debt-financing side of the market.

The leap into buyouts, however, has led to some eyebrow-raising among the private equity specialists. Skeptics question if the hedge funds are equipped to provide operational oversight to the companies acquired. Moreover, because of the shorter lock-up periods inherent to most hedge funds, some cynics have raised doubts over whether the asset class can demonstrate the necessary patience to invest in private equity.

Hank Lawlor, a co-founder and chief operating officer at Prides, told PEO that those factors are not an issue for his firm. He noted that when the Prides team was put together, the founders made it a point to recruit a group with a background as diverse as its strategy, and Lawlor added that the fund was structured explicitly to accommodate the longer time horizon needed for private equity investing.

“We have the staff to do these investments,” Lawlor said. “We’ve got a very deep team, with public equity, private equity, consulting, investment banking and high yield experience… And we structured our fund so we don’t have the issues that other hedge funds may have. We can be investors for 20 or even 30 years if need be.”

He identified that Prides has earmarked roughly 25 percent of its $350 million fund for illiquid, private company investments.

Prior to agreeing to the buyout, Prides had held a roughly 10 percent stake in the public stock of Pegasus. Lawlor would not comment as to whether Prides’ offer faced competitive bids, but reports indicate that the company has been in discussions with the firm since at least June of this year. The company had announced in April that it would be reviewing its strategic alternatives.

Bear Stearns & Co. advised Pegasus on the investment, while Locke Liddell & Sapp served as legal counsel to the company. Simpson Thacher & Bartlett advised Prides on the purchase.