Private Equity in Hedge Funds: A Weird Combination

File under "things which really don't make a whole lot of sense":

Lehman Brothers aims to raise $3 billion to $5 billion for a fund to buy strategic minority stakes in hedge-fund managers, according to sources at the bank. The fund, which has been called Omega, plans to invest in up to 12 hedge-fund managers.

The example given in the article is that of Aladdin Capital, which recently raised $39 million by selling a 19.5% stake in itself to Mitsubishi (!) implying a post-money valuation of $200 million. At that kind of valuation, Lehman's $3-5 billion fund could easily buy 12 hedge-fund managers outright, rather than taking "strategic minority stakes".

What's more, if Lehman is raising outside money for this fund, how can these minority stakes be strategic? I can see why Lehman itself might want to make strategic investments in the alternative-investment arena, using its own money, if it had any to play with. But this is other people's money, and those people are going to want some kind of an exit, which doesn't sound very strategic to me.

And in any case, why should small hedge fund managers want to sell minority stakes to any investor, financial or strategic? The barriers to entry in the hedge-fund world are significant, but they're not really financial. If you can't pay your overheads out of your management fees, you probably shouldn't be running a hedge fund in the first place, and I can't imagine that Lehman would be particularly interested in any hedge fund which was losing money on an operating basis.

So what is the purpose of raising equity in this manner? It's not like the money will pay for some kind of expensive marketing push to drum up new clients. I can just about see the rationale for a huge, established asset manager like Fortress Group or Man Group to issue publicly-listed shares. But private equity in hedge funds makes almost no sense to me at all.