Chapter 17

When Is an Activist Fund Really a Private Equity Fund, and What's the Difference?

In February 2006, activist hedge fund, Dallas-based Newcastle Capital Group Inc. joined forces with Steel Partners to buy restaurant chain Fox & Hound Restaurant Group for $168 million.1 What made that deal so special was not only that it was completed by a couple of activist hedge fund managers, but that they succeeded at wrestling the company away from a traditional private-equity company. Buyout shop Levine Leichtman Capital Partners Inc. had already inked a deal to purchase Fox & Hound for about $160 million.2

Newcastle president Mark E. Schwarz says he originally sought to launch a hostile offer for Fox & Hound but was unable to raise financing from traditional sources, many of which were prohibited from sponsoring hostile-like, unsolicited bids from insurgent investors. That's when he found Warren Lichtenstein's Steel Partner II LP, another insurgent with a specialization in activism and private equity. The two managers raised capital for the bid on their own. “We couldn't get financing for it,” Schwarz says. “We had to write 100 percent of the offer ourselves.”

The acquisition represents a shift among some activists. At one time Lichtenstein focused most of his energies on the insurgent strategy of buying large minority stakes in undervalued companies and pressing management to make changes through proxy fights or boardroom negotiations. But lately, he has supplemented that approach ...

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