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New Managers June 2012

47N Series - The scandal of founders' shares.

47 Degrees North Capital Management is a specialist alternative investment firm, and a pioneer in early-stage hedge fund investing. It was selected as one of three successful candidates out of 97 applicants to manage the emerging hedge fund managers program at CalPERS.

47N is a leading proponent of corporate governance in the hedge fund industry; so the objective of this series of articles is to discuss and inform on current corporate governance issues.

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Fraser McKenzie

The trust company scandal involving the Winchester House Group in Britain during the 1890's is an early example of the disadvantages of "founders' shares" for ordinary shareholders. The Economist of July 15th 1893 remarked; "Again and again we have warned investors against having anything to do with companies where founders' shares have existed...". Wise words indeed.

Founders' shares give control to the operators rather than the shareholders of an investment vehicle. In the case of Winchester House it was not until things had gone badly wrong that investors woke up to the knowledge that the unscrupulous founders had enriched themselves at their expense via the founders' shares. To add insult to injury, the damaging actions were later judged to be perfectly legal under the terms of the founders' shares arrangement.

Almost 120 years later, the problem of founders' shares still exists and with equal disregard by most hedge fund investors. But, as both distant and more recent history has taught us; the existence of this type of share class can represent a maj......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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