Deephaven Chiefs To Take 49% Stake In Own Firm

Oct 5 2007 | 11:24am ET

The stormy marriage between hedge fund Deephaven Capital Management and Knight Capital Group may be coming to an end. Deephaven’s partners are reportedly set to buy a big stake in their own firm from Knight, their parent company.

“Deephaven’s senior management is continuing to prepare to potentially acquire a significant stake in Deephaven by exercising our previously-announced option to acquire 49% of the firm’s equity from Knight Capital Group in the coming months,” CEO Colin Smith wrote in a letter to investors last month, the New York Post reports. “We are excited about this future development as we believe that by acquiring a direct equity ownership interest in the firm, coupled with the additional revenue sharing that we now enjoy, we will further strengthen our recruiting and retention efforts as we continue to grow.”

The sale is expected to go through in January, after which Minnetonka, Minn.-based Deephaven will split half of its profits with Jersey City, N.J.-based Knight up to $60 million in pretax earnings, and will share 25% thereafter. Under the terms of the deal, Smith cannot sell the firm for less than $450 million without Knight’s OK.

Last year, rumors swirled that Smith and his top deputies wanted out from under the thumb of Knight. Those whispers were squelched when Smith and his Deephaven cohorts signed a new employment contract, netting them an extra $20 million, in December.

But Deephaven leadership was reportedly unhappy when, last month, Knight warned it might have to repay a “substantial portion” of Deephaven’s incentive fees from its event-driven fund due to the current market turmoil. Smith and Co. were apparently also annoyed by Knight’s indication that it would slash its investments in Deephaven’s funds.

Deephaven manages about $4.3 billion.

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