Opalesque Industry Updates - |
– “Back to basics” in portfolio selection –
– “Blank sheet” approach to fund structure –
– “Pricing of liquidity” in capital allocation and risk management –
This week sees the launch of the Northlight European Fundamental Credit Fund, long/short credit fund, set up by a team of credit market veterans who were formerly at Goldman Sachs, Lehman Brothers and GLG Partners. The Fund is distinguished by a number of pioneering investor protection mechanisms built into its structure that addresses transparency, alignment and liquidity.
The team behind the Fund have worked together previously and have a strong record in credit investments, trading and of managing funds with similar strategies. In particular, Cyril Armleder and Charles-Henri Lorthioir worked at Goldman Sachs and then at GLG Partners in the capacity of co-manager and credit research analyst for the Credit Fund and various long/short credit, event driven and special situations portfolios in excess of $1.5bn. Shahar Zer spent 10 years at Lehman Brothers where he headed the leveraged loan trading desk and helped build out the European high yield platform.
The Cayman-based Northlight European Fundamental Credit Fund mainly focuses on high yield investment opportunities in Europe. The team believes that the European High Yield market is poised for significant growth over the next 5 years. This is driven by capital constrained banks reducing their lending, the continued closure of securitisation markets and companies’ desire to diversify their funding sources. Coupled with a continuing difficult operating environment, this presents significant opportunities in the credit markets to generate attractive risk weighted returns from the long and short side.
The structure of the Fund is an integral part of its proposition to investors and has the following important features designed to protect investor interests: 3WayNAV mechanism: The Fund employs the 3WayNAV mechanism, which by design, deals in a Bid, Mid and Offer NAV struck independently by Citco Fund Services using market prices. The Fund deals monthly on a Bid NAV for the outflow and the Offer NAV for the inflow and allows matching inflows and outflows at the traditional Mid NAV.
The key benefits of this are:
- Investor protection: 3WayNAV distributes to incoming and outgoing investors the transaction cost induced by upsizing or downsizing the Fund’s positions - rather than diluting the value of their investments.
- Transparency effect: 3WayNAV provides transparency to investors about underlying fund liquidity and any change in market liquidity and strategy slippage. It is the true measure of market leverage.
- Ability to price liquidity: Enables the Manager to correctly price liquidity through the investment and risk management process based on risk/return/liquidity.
- Aligned performance fee paid on exit: Half of the performance fee is reinvested alongside each investor in the Fund and paid on exit. This directly aligns the Manager’s long term compensation to each investor’s return.
- Institutional Operational infrastructure: The Fund’s operations and reporting requirements are managed by Bedrock RealTime SA (“BRT”), the specialised operations element of the Bedrock Group.
- Independent risk management: The Chief Risk Officer reports directly to the Board, and has the right to enforce risk limits. This process allows for independence in risk management and reporting.
- Independent Board of Directors: Each of the members of the Board of Directors has a distinguished background in an area of core importance to governing the Fund – corporate governance, risk management, trusteeship.
- Independent third party valuation: In addition to the 3WayNAV independently published by CITCO, BRT reconciles 3WayNAV daily and offers another level of independency in the structure.
Commenting on the structure of the Fund, Dan Page, Managing Director of BRT’s Business Development said:
“The global economic events of 2008 triggered a global paradigm shift in the funds industry. Many managers have taken steps to beef up their corporate governance and operational infrastructure. However, while many existing managers have battled outmoded infrastructure and re-organisation, the door has been opened wide for new managers and platforms to explore a “blank sheet” approach to operating in the new paradigm.
“Northlight is one such company. It has worked with BRT, Citco, JPMorgan and KPMG to address the issues of investor alignment, manager to investor alignment, risk control and transparency. At the same time it has retained an operational structure than enables it to fulfil its investment objectives and deliver in its alpha-generating sphere.”
Cyril Armleder, the CEO, added:
“We adopted the perspective that we would start with a clean sheet of paper and learn the lessons from the credit crunch. We drew one such lesson from funds’ mismatch of liquidity between assets and liabilities. Our structural approach promotes the mechanical alignment and transparency. Our mechanisms demonstrate a commitment to transparency, liquidity and alignment not only as a reporting tool but as a risk management tool. They reflect our conviction that self regulation and transparency can help address some of the systemic flaws that created the 2008 fund purge”.
Managing Partner Charles-Henri Lorthioir said:
“We have brought together a team where each member has a unique skill set that is complementary with the others. We believe that with this combination we have a competitive advantage in investing in these turbulent times.”
Managing Partner Shahar Zer said:
“We have put in place a structure that ensures our Fund is transparent and aligns the interests of the manager to investors and investors to investors. This allows us to focus on our core competency: generating alpha in the European credit markets and managing risk.”