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Investors target real asset and private equity stakes held in illiquid hedge funds

Tuesday, April 10, 2012
Opalesque Industry Update - Gamma Finance, provider of intermediary and advisory services to the alternative investment sector, is seeing increasing demand from private equity investors and real asset specialists looking to gain access to stakes held by hedge funds that have become illiquid.

Florian de Sigy, founder of Gamma Finance LLP comments: “Prior to the financial crisis, a number of credit hedge funds began to lend money to businesses through private loan facilities or asset based lending. These loans were often secured against real assets (such as physical property), equity, or future cash flows. Across 2008 and 2009, many of these businesses experienced a reduction in revenues and defaulted on these loans. Consequently the lender hedge fund took delivery of the collateral assets, and as a result, exit horizons were considerably extended when compared to the original investment”.

“Many of these borrower companies have subsequently been able to restructure and recover, but find that they are now partially owned, or controlled, by the hedge fund that originally lent them money as a way of creating a steady income,” continues de Sigy.

“This situation has created several positive outcomes”, adds Ben Keefe, Director and Head of Advisory, at Gamma Finance. “First, the restructuring of credit hedge funds into portfolios of minority and controlling equity positions provides a new and previously untapped source of investments for the private equity sector. Second, this benefits the hedge fund managers because they can access a new pool of specialist capital that can be used to meet outstanding investor redemptions. Third, it is positive for the underlying company, whose shares pass into the hands of experienced, long-term investors who are well placed to help develop and maximise the potential of their business over time, without the immediate need to meet investor redemptions,”

“The key to success here is the knowledge of where to look, and how to get access,” says de Sigy. “This is where we create a real advantage, we spend a great deal of time analysing the underlying portfolios of illiquid hedge funds and are well placed to identify the opportunities that are available. This, coupled with a good understanding of the characteristics of the investment opportunities, enables us to bring the right buyers and sellers together in a successful, value-added transaction.”

“The type of assets held by these hedge funds is diverse. Funds hold interests in private companies across multiple sectors, in locations across the globe, and at various points in the company’s capital structure.” comments Keefe. “Appetite for direct acquisition of these assets is just one of a number of emerging trends in the hedge fund secondary market at present.”

“In the three-years since Gamma Finance started, the hedge fund secondary market has developed considerably. As a result, Gamma Finance has also evolved to reflect these changes,” says de Sigy.

”Having been the first company in the secondary market sector to have added advisory services to the existing intermediary business in equal degree, we are now also the first to add corporate finance services to that offering.”

In 2009 when Gamma Finance was created, the secondary market was characterised by high net worth individuals making distressed sales of hedge funds to meet cash calls elsewhere. Distressed selling is no longer a feature of the market. Institutional investors are assessing their legacy illiquid holdings in light of regulatory initiatives such as Basel III and Solvency II, whilst other may be motivated to wind down leverage positions or simply clean their books.

“Specialist investors have acquired meaningful secondary market positions, creating dedicated portfolios illiquid hedge funds of $250m - $500m, often backed by long-term institutional investors who saw the potential for real yield creation,” says de Sigy. “Those investors have recently come back into the market for a second tranche of investments, whilst new players are joining the market.”

“The types of transactions being enacted have also changed,” says Keefe. “As well as trading fund shares, some institutional investors are exploring structured solutions, whilst others have started to take more interest in opportunities contained within the actual hedge fund portfolio itself - which has developed into the private equity trend that we are seeing now. This is why we have developed our corporate finance service offering.”

Press release

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