Hedge fund plan splits opinion
By Steve Johnson
Published: January 12 2009 02:00 | Last updated: January 12 2009 02:00
Hedge fund investors are deeply divided on radical plans by Steel Partners, the activist hedge fund group run by Warren Lichtenstein, to convert its flagship fund into a listed industrial holding company, as revealed in the Financial Times on Saturday.
The New York-based group plans to transform its $1.2bn ($792m, €892m) Steel Partners II fund into a holding company spanning energy, aerospace, insurance and banking, likely to be listed on either Nasdaq or the New York stock exchange in the second quarter of 2009.
Steel Partners took the controversial step after facing an unprecedented wave of redemption requests; as of October it had received withdrawal notices for 38 per cent of the fund's assets.
"This is groundbreaking. It is definitely the most creative and radical solution we have come across," said Mike Vogel, partner at Elcot, a London-based family office with a "substantial" investment in the fund.
However, Gary Vaughan-Smith, partner at SilverStreet Capital, a fund of hedge funds that did not invest in Steel Partners, said: "This is good for the manager and bad for investors." Other hedge funds have reacted to large-scale redemption requests by imposing restrictions such as "gates", which limit the amount that can be withdrawn each month, or the creation of "sidepockets", new vehicles into which hard-to-sell assets are placed.
Steel Partners' solution trumps these options by effectively trapping capital within the fund, aside from a share buyback of up to $200m, or 17 per cent of its assets, upon listing.
Investors will only be able to sell shares in the market - possibly at a steep discount to net asset value - preventing capital from leaving the fund.
Steel Partners said in its letter to investors that it would be "impossible, inequitable and unfair [to remaining investors]" to accede to the redemption requests, given the fund has large, often controlling, stakes in its portfolio companies, rendering it "difficult, and in some instances impossible, to sell assets and businesses quickly".
As of September, just four holdings accounted for 50 per cent of the fund's assets, with eight positions accounting for 80 per cent of its assets.
"We believe this is by far and away the best and fairest solution for all investors. This transaction will give all investors the potential to buy/sell units in the public market at any time," said Steel Partners.
Mr Vogel argued: "It does, to us, look a pretty fair balance in terms of remaining investors and those who were looking to redeem; they will be able to go into a vehicle that has much enhanced liquidity. [Steel Partners] has recognised that this is a transformational change in terms of what is going on in the market and concentrated on what works in terms of getting value out."
But with the average single manager hedge fund listed on the London stock exchange, the major centre for such vehicles, currently trading on a discount of 23 per cent to NAV, Mr Vaughan-Smith said: "If the client wants to exit then a proper plan should be put in place to return the client's cash over time, rather than forcing them into structures which make them take an immediate hit."
One industry consultant feared the move, if replicated, could make it harder for the hedge fund industry to raise assets in future.
However some industry figures doubted the holding company concept would become commonplace, arguing that more short-term "trading" funds could fall foul of tax and regulatory issues in many jurisdictions.
After posting compound annual gross returns of 22 per cent a year from inception in 1990 to 2007, Steel Partners II fell 39 per cent last year, according to figures seen by the FT.