June 4 (Bloomberg) -- Highbridge Capital Management LLC, the hedge-fund company with $34 billion of assets, hired former Goldman Sachs Group Inc. executive Scott Kapnick to start a private-equity business, a person with direct knowledge of the move said.

Kapnick, 48, who left Goldman as co-head of investment banking in December after 21 years at the bank, will help raise as much as $2 billion for a buyout fund that will begin investing in early 2008. He'll oversee a similarly sized credit fund, set to open as early as September, to finance other firms' takeovers, said the person, who asked not to be identified because the New York-based company's plans aren't public.

Hedge funds such as SAC Capital Advisors LLC, D.E. Shaw Group and Farallon Capital Management LLC have moved into leveraged buyouts as an increase in competition and a flood of new client cash have made profitable investments harder to find. JPMorgan Chase & Co. bought a majority stake in Highbridge in 2004.

``We'll see more hedge funds making the effort to branch into private equity as an additional way to raise assets,'' Mathieu Klein, chief executive officer of Paris-based investment adviser Darius Capital Partners, said today in an interview.

Highbridge's assets have soared more than fivefold since JPMorgan said it would buy a controlling stake in 2004. Its private-equity unit will focus on the U.S., Asia and Europe, according to the person. It also plans a real-estate fund.

Fund Returns

The 15-year-old firm's flagship hedge fund returned 24.7 percent in 2006, beating the 15.8 percent increase including dividends by the Standard & Poor's 500 Index. The fund, started by childhood friends and former E.F. Hutton colleagues Glenn Dubin and Henry Swieca, both 50, has returned an average of 15.5 percent a year since its inception.

Kapnick, who will start this month, declined to comment through a spokeswoman. Brooke Harlow, a spokeswoman for Highbridge, declined to comment. Highbridge's new private-equity fund will invest money from clients and managers of the firm. It won't use JPMorgan bank capital, according to the person familiar with the plans.

JPMorgan Spinout

JPMorgan spun out its former private-equity arm, called JPMorgan Partners LLC, in August. The principals of that division formed CCMP Capital Advisors LLC, which focuses on buyouts in areas including energy, industrial production, health care and media. It has offices in London, New York, Hong Kong and Tokyo.

The bank kept One Equity Partners, its private-equity arm that was started under the Bank One banner prior to Bank One's acquisition by JPMorgan. One Equity Partners manages about $5 billion in investments for the firm.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Private-equity firms acquire part or all of a company using debt to finance about two-thirds of the purchase price. They usually hold investments for three years or more while they seek to improve profits. They then try to sell to other companies or investors through an initial public offering.

Hedge funds worldwide manage $1.57 trillion, more than double the amount in 2001, according to Chicago-based Hedge Fund Research Inc. The number of funds has more than doubled since 2001 to about 9,600 as of the first quarter, according to the research firm.

Private-equity firms may raise $500 billion this year, a 16 percent increase from $432 billion last year, according to London-based Private Equity Intelligence Ltd.

Kapnick joined Goldman's corporate-finance department in 1985 and became a partner in the New York-based firm in 1994. He became a global co-head of the investment bank in 2001. He was removed as co-CEO of Goldman Sachs International in July by Lloyd Blankfein, who had succeeded Henry Paulson as CEO of the company.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: June 4, 2007 09:27 EDT