Top 100 Hedge Funds
Hedge Fund 100: The Trillion-Dollar Club
Following a year marked by significant losses and redemptions, Alpha's annual ranking of the world's biggest hedge fund firms has a mix of new players and old favorites. The firms listed in 2009 Hedge Fund 100 oversaw a combined $1.03 trillion in assets. Although by most measures that is a kingly sum, it is nonetheless down substantially from the record $1.35 trillion the world's 100 largest firms managed at the end of 2007.
| 2009-04-25 14:07
| 2009-04-25 13:56
Corporate Bankrupcies Show Credit Default Swaps Should be Banned
Stock-Markets / Credit Crisis 2009
Apr 23, 2009 - 07:24 AM
Martin Hutchinson writes: For frustrated investors looking to justify the ban of credit default swaps (CDS), look no further than last week’s corporate bankruptcies of Canadian newsprint producer AbitibiBowater Inc. (ABWTQ) and U.S. shopping center developer General Growth Properties Inc. (GGP).
In both of these cases, credit default swaps became an actual bankruptcy catalyst - for the first time ever.
In the lead-up to both bankruptcies, the lenders who had debt outstanding - who would have the right to vote on any reorganization - had hedged their debt through credit default swaps and so stood to benefit from the company’s bankruptcy. That made it very difficult for both companies to get the majorities they needed for debt reorganization, making bankruptcy inevitable.
The CDS holders were in the position of seeing a 1929-vintage stockbroker balanced on a window ledge, and yelling “Jump, jump” - while simultaneously taking bets on the result.
In the AbitibiBowater bankruptcy case, holders of credit default swaps played two key roles:
They were spectators and potential litigants.
And they were the generator of lawsuits.
Let’s consider the first point.
When AbitibiBowater missed a bond payment on March 20, there were a lot of CDS derivatives outstanding that were close to maturity. Holders of these securities wanted to have AbitibiBowater immediately declared in default so that they could collect - a delay would allow their credit default swaps to expire.
However, non-payment of bond obligations generally does not become an actual “default” for several days (because the company is given a few days to come up with the money). Moreover, AbitibiBowater obtained a court order allowing the bond payments to be suspended while the company completed its debt restructuring. Thus, the CDS holders (to a value of about $500 million) were out of luck.
Or were they?
An International Swaps and Derivatives Association (ISDA) ruling on March 28 allowed CDS holders (as of March 20) to claim payment through a cash-auction system, as if a default had actually occurred.
The second role that CDS holders played truly was analogous to sadistic spectators placing bets at a suicide. Bowater (which had merged with Abitibi in an over-leveraged deal just two years ago) wanted to exchange its 9% bonds in order to improve its cash flow and to remove the likelihood of bankruptcy. To do this, it needed 97% acceptance from holders of bonds maturing in 2009 and 2010. The company was only able to get a 54% acceptance - largely because many bondholders also held credit default swaps, and so would actually benefit, rather than lose, from a Bowater bankruptcy.
General Growth, a shopping center developer with $27.3 billion in debt (real money even these days) - making it the largest default in U.S. real estate history - demonstrated the darkening cloud that’s hovering over the U.S. commercial real estate market. It also underscored the risks of being involved with credit default swaps.
General Growth’s mortgage debt had been securitized into mortgage-backed bonds, many holders of which had also bought credit default swaps, so debt restructuring proved impossible. Credit default swaps on General Growth’s vaunted Rouse unit were valued by auction on April 15, and were deemed to be worth 71% of par, so investors in them received $710,000 for each $1 million of CDS they held - a nice reward for voting “no” to a corporate restructuring.
Guess what? If busted insurance giant American International Group Inc. (AIG) was the writer of any of the credit default swaps on either AbitibiBowater or General Growth, we as taxpayers have paid the profits of the guys who forced those companies into bankruptcy.
A comforting thought, isn’t it?
The credit-default-swap rap sheet is becoming quite long. In the AIG case, CDS securities allowed an insurance company to write more than $200 billion worth of contracts, booking the premiums as income and reserving nothing against the potential losses, thus bankrupting itself at taxpayer expense.
Credit default swaps then allowed major banks - such as Goldman Sachs Group Inc. (GS) - to collect large sums through their holdings of AIG CDS contracts, while themselves having protection against an AIG bankruptcy, thus double-dipping at the expense of American taxpayers.
These big financial institutions have now facilitated the largest real estate bankruptcy in U.S. history - as well as the bankruptcy of the world’s largest supplier of newsprint - by preventing creditors from agreeing to restructuring plans.
These same perpetrators were an accessory before the fact in the Lehman Brothers Holdings Inc. (LEHMQ) bankruptcy, because they provided the best-leveraged and highest-volume method by which hedge funds could benefit from a Lehman default - the CDS markets had much bigger volume than the stock-options markets, and better leverage and less risk than a direct short sale of Lehman’s stock. By buying credit default swaps and shorting Lehman stock, hedge funds caused a classic “run” on that unfortunate institution that would probably not have occurred otherwise - or even been possible.
In each of these cases, credit default swaps have imposed costs on taxpayers, on the U.S. and Canadian economies, and on society in general. And these costs are outside the terms of their own contracts.
If credit default swaps were just Wall Street gamblers’ playthings - used to “hedge” exposures and provide gaming opportunities for hedge funds - the securities might have some modest net social utility.
However, in the cases we’ve highlighted, the CDS market has proved to be a means of extracting rents from taxpayers and other outsiders. If AIG had been allowed to go bankrupt properly - causing huge losses to banks, investment banks and hedge funds - credit default swaps might well have died a natural death.
The rescue of AIG provided them with artificial life support - thanks to a U.S. taxpayer subsidy of more than $150 billion - a fact that has perpetuated their existence.
In terms of regulation, a moderate step would be to allow the purchase of CDS securities only by those with an “insurable interest” in a particular debt. Further provisions could be written, providing that voting rights on a debt were transferred as credit default swaps were written on that liability. You could even force CDS securities to be weighted 100% in bank risk capital calculations, as if they were direct loans.
However, even a CDS purchase to offload a direct credit risk can equally well be undertaken by a simple sale of the debt, which would at the same time transfer its voting rights in any bankruptcy.
Since hedging and transfer of a debt position is perfectly possible without the existence of credit default swaps, what valid economic purpose do they serve?
I’m one of the biggest free-marketers on the planet, but these things aren’t the free market, they only work because of bank regulation and the “too big to fail” doctrine. When I ran a derivatives desk in the 1980s, we looked at the possibility of credit default swaps - it was an obvious derivatives application - but we decided that they were impossible to hedge and their payout in default was too uncertain for them to be sound financial instruments.
We were right. The market for CDS securities only mushroomed in the late 1990s because - by that stage in the long economic bubble - bankers had stopped worrying about long-term soundness if it meant they could receive larger short-term bonuses.
Let’s ban them. Wall Street will scream about the loss of income, but that loss will be trivial compared to the amounts taxpayers have already paid to bail out Wall Street from its mistakes. The modest economic benefits of credit default swaps are dwarfed by the costs and distortions they impose.
| 2009-04-23 07:24
Private Equity firms not losing hope
20 Apr 2009
Private equity investors, it is believed, have the expertise to understand the complex ways in which businesses operate. Retail investors have so
much faith in PE firms' domain knowledge that they favour companies that have high institutional holding.
However, nearly 50% mark-tomarket (MTM) losses on their India portfolio has shaken the market's faith in PE firms. In dollar terms, the losses amount to around $2.3 billion on total investments of $6.3 billion in India(for deals struck in the year 2007 and 2008).
The losers include the very best of PE fraternity, with names like Citigroup, Temasek, 3i, UTI Venture Funds, CLSA, Warburg Pincus and JP Morgan figuring in the list. Losses suffered by retail investors, who invested in companies with high institutional holdings, could be many times the losses posted by PE firms. Despite the fall in value of their investment, retail investors are still holding on their investments. Bogged by the ups and downs of the market, they are left wondering as to what should be their next step.
The extent of losses is huge. Less than 10% of the 93 private investments in public equity (PIPE) deals struck in 2007 and 2008 are in the black, because of high entry points. The two worst deals, in terms of notional erosion of value, are the investment by New Vernon in Prime Securities and Kotak's investment in Heritage Foods.
At the current stock price of the two companies, the MTM losses work out to be 93% and 91%, respectively. It is not only the loss suffered but an exit horizon is also not visible. Nalanda Capital's investment in Vaibhav Gems in the year 2007 has eroded its networth by 90% over a span of two years. A number of PE firms have invested heavily in unlisted companies. The losses could be huge, given the high valuations that many of such companies got then.
The average loss on investment for all private equity deals done in 2008 stands at 39%. The results of 2007 are not better either. Private equity investments struck in 2007 stand to lose $1.73 of their value at 35%.
The losses suffered by PE investors show the frailty of the India story, as no sector escaped value erosions. The worst affected sectors are real estate, information technology, banking and financial services, and healthcare. Clearly the perception that PE money is smart money remained just, a perception.
All hope is not lost yet. These investment honchos have managed to strike some good deals as well. A consortium of PE players like Saffron, Trinity, Barclays, T Rowe Price have made close to 50% profit on their investment in Phoenix Mills, a commercial and retail real estate developer. Nalanda Capital's stake in regional entertainment and news channel, Sun TV network has also grown by a credible 40% over its investment last year.
Nonetheless, there are some other positives also. Unlike portfolio investment, PE money could stay in India for another two-three years . Retail investors could, thus, avoid liquidating their portfolio. Recovery in equity market is not expectetd any time soon, patience would still prove to be a virtue.
The losses suffered by PE firms prove that the market spares none, not even the brightest of brains in the street. All valuation tools have been savaged at the altar of market volatility. Even the smartest guy in the street has been beaten down.
Though it is too early to comment on the investment rationale and valuations at which these deals were struck, the fact remains that PE firms are in no urgency to exit. This leaves a clue or two for the retail investor.
Note: It is assumed that the investments made during 2007 are still being held by the PE investors to arrive at current MTM value, for want of data.
| 2009-04-20 22:53
Japan’s Hedge Funds Shun Trading Models to Find ‘Hidden Jewels’
By Tomoko Yamazaki and Komaki Ito
April 7 (Bloomberg) -- Hideki Wakabayashi sat through 500 meetings with company executives before settling on the stocks that produced a 13 percent advance last year for the long-short equity hedge fund he runs at Tokyo-based Finnowave Investments.
Toru Hashizume matched Wakabayashi’s performance with a 13 percent return for his Ginga Service Sector Fund by following a similar path. He said he sifted through 800 stocks before betting on about 70.
The Japanese hedge fund managers plan to beat benchmarks again in 2009 by shunning computer-driven trading in favor of company research. Their gains contrast with the average 19 percent drop of global hedge funds, according to data compiled by Chicago-based Hedge Fund Research Inc., and the 42 percent slump in the Nikkei 225 Stock Average during 2008, the index’s worst annual performance.
“When everything is sold right down and individual companies are in make-or-break mode, it is likely to be more of a stock-picking environment,” said Peter Douglas, principal of GFIA Pte, a Singapore-based hedge-fund consulting firm. “The hidden jewels of Japanese hedge funds will have a good year.”
The 10 billion yen ($100 million) Finnowave fund has extended its gains this year, returning 1.6 percent in January and 1.3 percent in February, compared with a 0.3 percent increase and 0.7 percent decline, respectively, by the Eurekahedge Hedge Fund Index tracking more than 2,000 funds.
Hashizume at Tokyo-based Stats Investment Management Co., which looks after 7.2 billion yen and advises the Ginga fund, has limited declines at his telecommunications and services- focused fund to about 2 percent this year, while indexes tracking those industries in Japan slumped 21 percent and 14 percent, respectively.
About 90 percent of the more than 200 hedge funds that focus on Japan are research driven, shunning the model trading strategies that account for almost half of the global industry, according to data from Eurekahedge Pte. and Hedge Fund Research. About 40 percent of funds that focus on Japan posted positive returns in 2008, compared with 27 percent in Europe and 38 percent in North America, Eurekahedge reported.
Japan’s independent hedge funds, those not affiliated with a financial institution, hold a fraction of the assets relative to global firms like Kenneth Griffin’s Citadel Investment Group LLC, which has $13 billion. They account for 95 percent of Japan-focused hedge funds and manage a total of $12.1 billion in assets, according to Singapore-based Eurekahedge.
“Japan-focused hedge funds are making money,” said Ed Rogers, chief executive officer of Rogers Investment Advisors Y.K. in Tokyo, whose $15 million Japan-focused fund of hedge funds, Wolver Hill Japan Multi-Strategy Fund, returned 6 percent in 2008. “The numbers just don’t lie.”
Finnowave mainly invests in stocks with a market value of at least 50 billion yen. The firm profited in 2008 by betting that shares of electronics stocks and export-driven companies would fall, and by acquiring shares of companies such as Nohmi Bosai Ltd. that benefit from an increase in domestic demand. Wakabayashi covered the electronics industry as an analyst at Nomura Holdings Inc.
Finnowave bought shares of Nohmi Bosai, a Tokyo-based maker of fire alarms and extinguishers, for about 600 yen each and sold them for more than twice that toward the end of the year.
Among other stocks that contributed to last year’s gain was Yokogawa Bridge Holdings Corp., a Tokyo-based bridge and steel tower builder. The fund invested in the shares on expectations that recent bridge collapses worldwide may boost demand for Japanese bridge builders that have among the best technologies in the world, Wakabayashi said.
In 2007, a Minnesota highway bridge collapsed, marking the worst such accident in 25 years, while in central China’s Hunan province a bridge collapse left more than 30 people dead.
Wakabayashi has switched gears and said he is investing now in export-driven stocks and selling domestic-demand shares, on the view that much of the negative news has been priced into shares of many exporters. He declined to name specific stocks.
He said he is also focusing on firms that may benefit from increased awareness of energy saving and environment-related issues, such as Sumitomo Electric Industries Ltd.
“The funds that are going to survive will be those that are doing the legwork and researching their companies -- craftsman-like funds,” Wakabayashi said.
Epic Partners Investments Co.’s Prowess of Japan Fund, a so-called market-neutral fund that favors stock picking, returned 17 percent in 2008 and extended its gain to more than 4 percent this year. A weakness of many computer-driven models is rigid stop-loss selling, said Tetsuya Abe, head of compliance at Epic, with 36 billion yen in total assets. A stop-loss order triggers the sale of a security when it falls to a certain price.
“In an environment where we had the market going up and down by more than 10 percent on a daily basis, you start to see irrational pricing on stocks,” said Tokyo-based Abe. “We don’t abide by the stop-loss rule, so our managers held some valuable investments.”
GFIA’s Douglas said Japan’s so-called lost decade in the 1990s, when asset prices declined and bank bailouts hobbled the economy, prepared Japanese hedge fund managers better than their overseas rivals to navigate challenging investment times.
The Nikkei 225 fell 60 percent during the past 15 years, while the Dow Jones Industrial Average in the U.S. rose more than 90 percent.
Douglas’s firm made an average 2.3 percent from its Japanese hedge fund holdings in 2008, while the MSCI World Index of 1,678 companies plunged 42 percent.
“You have a few skilled professionals who’ve grown up over the last 15 years investing in extraordinarily difficult markets,” Douglas said. “Tokyo managers have learnt how to roll with the not-inconsiderable punches thrown at them.”
To contact the reporters on this story: Tomoko Yamazaki in Tokyo at email@example.com; Komaki Ito in Tokyo at firstname.lastname@example.org
Last Updated: April 6, 2009 21:19 EDT
| 2009-04-06 21:19
Most private infrastructure funds are sponsored by large financial institutions through their investment banking units, according to industry data. Goldman Sachs completed the first bank-sponsored fund in the U.S. in 2006, raising $6.5 billion, of which $750 million came from the investment bank. It is now campaigning for a successor fund, which industry reports say is capped at $7.5 billion, though a source says the actual target is well below that mark. Goldman Sachs declined to comment on the fund.
Its first fund was used for the $22 billion LBO of oil pipeline company Kinder Morgan Inc. and to purchase seaport facilities operator Associated British Ports Holdings plc, which a Goldman-led group bought for £2.8 billion in 2006.
Morgan Stanley Infrastructure Partners began investing in 2006, closing two major investments before it wrapped up its first fund with $4 billion in May 2008. The fund, which targets transportation, energy, utilities, social infrastructure and communications assets, surpassed its $2.5 billion goal despite a difficult environment.
It has a fund life of 15 years, looking to invest in assets highly correlated with inflation that can generate returns of 12% to 15%, says Sadek Wahba, Morgan Stanely's infrastructure head.
Last year it teamed with Ontario Teachers' to buy Saesa Group, a Chilean electric distribution, transmission and generation subsidiary of New Jersey electric utility Public Service Enterprise Group Inc., for roughly $870 million, plus debt. And in December 2006, Morgan invested in a $563 million purchase of Chicago Loop Parking LLC, the largest underground parking system in the U.S.
UBS closed its $1.52 billion infrastructure fund in October to invest in mature assets involving utilities and transportation, among others, aiming for returns of 10% to 13%, says Heap. Its first investment, in 2007, was a $348 million purchase of a 50% stake in Northern Star Generation LLC from another infrastructure fund, AIG Highstar Generation LLC. UBS was also part of a consortium that purchased British water and sewage company Southern Water Capital Ltd. from Royal Bank Investments Ltd. for £4.2 billion in 2007.
Citigroup launched Citi Infrastructure in 2007. It lured Felicity Gates, who previously led a Deutsche Bank AG affiliate's North American infrastructure business, and Juan Béjar, formerly head of infrastructure at Spain's Ferrovial Infraestructuras and former CEO of Cintra. Citi is still marketing its first infrastructure fund and wouldn't comment. Reports pegged the target at $5 billion.
Carlyle joined the fray with a $1.15 billion fund completed in November 2007. That year, it bought biosolid recycler Synagro Technologies Inc. for $772 million. And in May 2008, it took a majority stake in ITS Technologies & Logistics LLC, an intermodal facilities operator that helps move goods through North America by transferring containers from rail to trucks.
Carlyle says it aims to improve assets by making them more efficient through incentives or building them out through acquisition and expansion. Generally, "the most appropriate use of funds is for projects or assets with some level of existing operations," says Barry Gold, Carlyle's co-head of infrastructure.
What might help counter community resistance is to deploy capital into projects that benefit the public or provide "essential service" in a way sensitive to needs of all stakeholders, says Gold.
That means staying flexible, he adds.
Carlyle plans to look at the transportation, water distribution-wastewater treatment and social infrastructure sectors, which are public benefit assets that would serve users even in dire times, he says. But the firm won't rule out making greenfield investments that make economic sense, such as a shovel-ready road projects designed to relieve traffic congestion.
KKR launched its infrastructure initiative in May 2008 with a big splash. It poached energy investment banker George Bilicic of Lazard to spearhead the effort. Bilicic sat across the table from KKR when the buyout house, along with TPG Capital, acquired Texas utility TXU Corp., now Energy Future Holdings Corp., in the largest LBO on record. In informal discussions with LPs, KKR had talked about a $10 billion fund with limited partners, according to a source. Not long after Bilicic rejoined Lazard and assumed his old position as head of global power and utilities, KKR came out with a prospectus targeting a $4 billion fund to be led by Marc Lipschultz, who heads its energy and natural resources group.
Not to be outdone, Blackstone also aims to raise a fund reportedly targeting between $2 billion and $5 billion, though details are sketchy. Reports said the fund has not yet begun fundraising. According to Preqin Ltd., the New York firm will invest in a range of developed infrastructure assets in the U.S. and Europe. The firm recently hired Trent Vichie and Michael Dorrell from Macquarie Capital in New York as founding partners of Blackstone Infrastructure Partners.
KKR, Blackstone Group executives and Bilicic all declined to comment.
The focus for many institutional investors appears to be shifting to independent funds partly because of uncertainties over continuing support from financially stressed institutions, according to industry executives.
AIG Highstar, a private equity fund that invests in infrastructure, has dropped AIG from its name, although it remains tied to the embattled insurer in so far as AIG is a limited partner.
Founded in 2000 by Christopher Lee, a former Chase Manhattan Corp. and Lehman Brothers Inc. executive, the firm is in the market for its fourth vehicle, after raising $3.5 billion for its third in 2007.
Another large group, Global Infrastructure Partners of New York, is a joint venture between Credit Suisse Group and General Electric Co.'s infrastructure division, launched in late 2006. Credit Suisse sought to capitalize on its and GE's project finance expertise, a source says. Each contributed $500 million to a $5.64 billion fund that closed last March, having the advantage of raising money before the crunch hit.
GIP's team, mostly consisting of investment bankers, is led by Adebayo Ogunlesi, chairman and managing partner and a former CS investment banking chief. The fund, together with AIG affiliate AIG Financial Products Corp., acquired London City Airport, the U.K. capital's fifth airport, in 2006 for a reported $1.4 billion in October 2006.
How has that portfolio holding performed? "Better than OK, even in this environment," says a source.
Except for energy infrastructure specialists, some of which have been very successful, most U.S. players are first-time funds, and it's too early to judge performance. Those with exits may have an edge. Alinda Capital Partners LLC boasts the first independent infrastructure fund in the U.S. Launched in 2005 by ex-Citigroup project finance experts led by Christopher Beale, the firm completed a $3 billion fund in 2006.
Alinda began fundraising last year for a successor vehicle with a $3 billion target and has pretty much raised that amount. It helped that it has had partial realizations, including the sale of airport assets in Australia and in the U.K. divested by portfolio holding BAA Ltd., the British airports operator owned by Spanish construction group Grupo Ferrovial SA.
Alinda, GIP and other bank-sponsored funds now fundraising declined to comment.
Charting the risk-return profile for infrastructure and setting benchmarks remains a work in progress. Funds entering the market come up with a structure and strategy for investment vehicles, targeting returns that generally assume some leverage on the underlying portfolio. Early studies pegged net returns for most managers at between 9% and 12%. But those numbers predate the credit boom. They also vary depending on the underlying assets. According to J.P. Morgan Asset Management, toll roads may get 10% to 12% and airports may get 15% to 18%, against an average of 10% to 15%. For instance, Alinda Capital, focused mostly on brownfields, generally targets a base return of 12%, but it may gain a further 3% through operational enhancements and a potentially lucrative exit multiple, according to sources.
In general, brownfields investments with well-established cash flow tend to produce the lowest returns, with a target internal rate of return of about 10% to 12%. Depending on how much capital is invested, rehabilitated brownfields -- assets that are built but that may need capital improvements or expansion -- may offer 15% returns.
For greenfields, or projects that need to be built, investors may hope for 18% to 20% returns because they take on design, construction and operating risk. Most private infrastructure funds appear to have multiple investment targets, typically a combination of brownfields, greenfields and secondary investments, according to Preqin Ltd.
Even before the credit crunch, heightened competition fueled by the proliferation of funds eroded return expectations from double to single digits, the OECD reports. "The first-mover advantage typical for new asset classes has run out," it says. Macquarie's earlier funds were reporting IRRs of around 20% because "it had the market to themselves," says one New York fund manager. But as the market became more liquid and efficient, pricing has become more aggressive, with target IRRs relying on increasing amounts of debt and equity.
Critics have pointed to recent auctions such as the concession sale, announced in October, for Chicago's Midway Airport, the first privatization of a U.S. airport, saying bidding was quite aggressive. The winning group, Citi Infrastructure in partnership with Vancouver International Airport Authority and John Hancock Life Insurance Co., bid a little more than $2.5 billion.
"The whole market was appalled," says a fund manager familiar with the auction. The bid was all equity, the source says, but even without debt, bidders were targeting a 15% IRR.
The unsuccessful privatization of the Pennsylvania Turnpike also drew what many viewed an aggressive bid from Citi-Abertis, whose $12.8 billion offer, said to be 60 times projected Ebitda, was well above the next highest bid of $12.1 billion from Goldman and Transurban Group, Australia's second largest toll-road operator. Macquarie bid $8.1 billion, which fell below the threshold, and was shut out from the final round. Citi declined to comment on the auctions.
Infrastructure assets can usually support 50% to 75% debt in the capital structure, says UBS' Heap. But using too much leverage can backfire, as it did for Australia's Babcock & Brown Ltd. and Allco Finance Group Ltd., both of which emulated the Macquarie model and are now bankrupt. Analysts say it didn't help that some of their debt structures were provided on a short-term basis, a mismatch to the longer time frame for underlying projects.
"When times get tricky, it's possible to have plenty of breathing room at the operating level yet still be unable to meet debt service at the holding company level," says Heap. Their analysis didn't factor in the global financial crisis, which have forced such firms as Babcock to sell assets at fire-sale prices. "Infrastructure projects can handle more leverage than private equity projects in normal economic cycles, but not overly excessive leverage," says Mark Weisdorf, global chief investment officer of J.P. Morgan Asset Management, which has its own fund as well. "If a project's cash flows decline when an asset is 90% levered, it could cause problems."
The bankruptcies have hurt Macquarie, whose listed funds are down about 40% for the year amid continuing worries over asset valuation. Macquarie has considerably more resources than its bankrupt imitators, but the listed infrastructure fund model it pioneered has understandably taken some hits from critics who argue that it's "broken."
Last year, institutional advisory firm RiskMetrics Group Inc. issued a scathing critique of the complex structures of the model, which it argued was flawed, in part because of the danger of overpaying for assets. A spokesman for Macquarie says the firm addressed the report in detail at the time, including making various corrections. It has also made corporate governance changes in its listed funds since the report was published, he adds. In recent months, the firm has tended to take on the role of adviser rather than acquirer, sources say.
Under prevailing conditions, investors being pitched by PE-style infrastructure funds may need a lot more convincing. For one thing, the typical 2%-20% fee/carry structure is less compelling. Canadian pension funds have long argued that if infrastructure funds are pitching low- to midteen returns, the standard 2%-20% economics makes no sense, which is why they've tended to invest in assets directly. With limited leverage, there's even less justification for it, they say.
Still, most infrastructure funds retain 2%-20%, with a hurdle rate averaging 8%. There are variations: The management fee might be a sliding scale, and the hurdle rate could range anywhere from 6% to 12%. Carlyle came in early in the cycle with a 1.5%-20% structure and a 12-year life, plus a two-year extension. The fund is targeting returns in the upper teens, a source says.
KKR's diminished rates are a big departure," says a large LP in KKR's buyout funds. "That does say that some of the pension funds aren't prepared to pay 2% to 20% on products that have a lower risk profile in a class where they are or can be more direct participants themselves."
Another concern is the risk that PE funds might stretch the definition of infrastructure. As one disgruntled pension fund manager explains: "You can have two different power plants. One fully contracted for fuel supply and providing electricity for 50 years. That's an infrastructure plant by our definition. On the other hand, another plant may buy fuel in the spot market and sell electricity in the spot market. That's a merchant power plant, and there's lots of them around. In theory, the first will have much lower returns and won't sustain a 2% to 20% structure." Says one Canadian investment officer: "If private equity looks into it, they'll start pushing into the second type. It's in their DNA."
Moreover, pension funds with long-term funding liabilities to worry about seek a very high return of capital to cover those liabilities. Buyout shops normally have a holding period of about five years, but that's not usually long enough for pension funds and other investors.
"IRRs are only one snapshot of performance," says one fund manager. "Sophisticated investors look at how much capital comes back in 10 years or more." Alinda Capital and others have a 10-year holding period, but some funds may have shorter holds and exit within five years, sources say.
Investors are also leery of the lack of infrastructure expertise among traditional private equity firms. "There are LPs out there saying that other funds might have more or deeper expertise in infrastructure than KKR or Blackstone," says one investment adviser. To be fair, KKR has been hiring project finance experts as part of the investment team, as have others, but there's a shortage of truly seasoned infrastructure executives, industry observers say.
All things considered, private equity funds with appropriate structures might still get the benefit of the doubt. For pension funds that are increasingly attracted to the asset class, the advantages of improving social and economic infrastructure assets may outweigh concerns over low returns.
At the same time, public-sector authorities will need to adapt their own management models to reward employees for efficiencies, cost savings and making the asset work better for users, says Gold. Accountability will be important, and revenue sharing is one way of achieving that, he adds.
And while financial engineering may ultimately help boost fund returns, it isn't the only factor, experts say. Fund managers can just as well focus on operational changes to get multiples of return on capital. In that respect, the LBO folks might yet make a good stab at outperforming their peers.
| 2009-04-06 21:14
Posted: Sun, Apr 5 2009. 10:44 PM IST
The cost of capital of private equity is very high
The rising tide raises all boats but when the tide is going out, and there is no ambiguity that it is going out, a lot of PE firms who should not have existed in the first place will not existSanat Vallikappen Goa: With the booze, the beach and a magnificent setting on the ramparts of a 16th century Portuguese fortress, last week’s 2nd Biennial China-India PE Summit turned out to be a perfect place for stressed fund managers to loosen up after a very tough year. The meet was organized by Capvent AG, a private equity, or PE, fund of funds with $1.3 billion (Rs6,539 crore) under management. But no amount of this relaxed setting could make a difference to one man’s rather bleak outlook for the PE industry. Rahul Bhasin, managing partner of Baring Private Equity Partners (India) Pvt. Ltd, a PE fund that manages in excess of $1 billion in India, is well-known for his radical views. He was in peak form on Thursday when, one the sidelines of the conference, he talked about private equity’s woes in the context of its gigantic size, the gloomy outlook for global and domestic growth, the unpredictability of long-term outcomes, and the slow recovery in the West. Edited excerpts:
Straight talk: Baring Private Equity Partners (India) Pvt Ltd managing partner Rahul Bhasin. Harikrishna Katragadda / Mint The industry is five times too large.
We had $20 billion of investments in an $800 billion economy year before last (2007). That’s roughly 2.5% of our GDP (gross domestic product). The highest ever that the US reached was 1.4% of its GDP. Out of that 1.4%, more than 80% was taking public companies private, an opportunity that is not available in India. In China, the absolute investment numbers are similar, except that GDP is three-and-a-half times the size of ours.
The second issue is the explosion of private equity firms. There are 540 funds (active in India). I got this from one of my investors who tracked the number of people who tried to raise money from him, and includes private equity, venture capital and real estate funds. I don’t think it will be a significant exaggeration. Is the market deep enough for 50? I doubt it.
The rising tide raises all boats but when the tide is going out, and there is no ambiguity that it is going out, I think a lot of private equity firms who should not have existed in the first place will not exist. May be it’s five times too large and this means that 70-80% of the funds that exist today will not exist five years from now.
Lower GDP growth pares returns.
In India, all returns are driven by growth... The challenge is that the cost of capital of the private equity industry is very high. Investors expect that you (the fund) will offer them at least a 25% dollar return. The growth (of GDP) used to be 9-9.5% in real terms,15-16% in nominal terms, 22% in currency appreciated terms (the currency was also appreciating in 2007) and, if you picked the sectors right, you could get 5-10%. Finally, if you picked the companies right, you could get another 5-10% on that, which theoretically brought you to almost 40% returns. Assuming that we made some mistakes, still it was possible to get 30% return.
Now, the GDP growth is likely to be around 5% and, in the short term, even lower. We think this year will be closer to 4% largely because manufacturing is going to have a tough time recovering, and industrial production growth will be infrastructure-related. Agriculture has had four spectacular years in a row and it’s very tough to repeat that kind of growth.
The other reasons for lower growth.
Investable savings will come down rapidly, largely because the extra-normal profits of the resource industries in India—responsible in a large way for the jump-up in savings rate—have vanished as resource prices corrected. My own guess is savings rate will go down from 33-34% to 25-26%. We will have a lot of debt from the banking system globally, which is due for repayment, getting repaid this year. Debt will not get rolled over and, therefore, the net investable savings in the GDP will go down. It’s very tough to see how more than 13-14% of GDP can be invested this year, against 37-38% last year.
Topline growyh of portfolio companies to go for a toss.
The topline growth is going to be significantly lower in the companies private equity funds invested in. Besides, your cost of capital has not come down because risk perception has gone up. Because of high risk perception, a lot of assets all over the world are giving you very high returns. So you have to generate those returns to attract capital into India.
No margin expansion either.
If you can’t get it (returns) from (topline) growth, the second place you can typically get it from is margin expansion. We’ve been working very hard with our portfolio companies to reduce working capital cycles and expand margins, but we have not succeeded. We have helped them maintain their margins.
If you look at the cycle around 2001-02 (bottom of the cycle) profits after tax as a percentage of revenue of the Indian corporate sector was around 1.7%. Last year (at the peak of the cycle) it was 6.7%. So if you assume that the cyclicity will get repeated, you would assume that the profitability of the private sector can get hammered.
Capital structure efficiency not easy.
When topline growth goes away, margins growth is very hard to come by. The third thing that private equity can do is capital structure efficiency or balance sheet efficiency, which often means the ability to take away resources from a business which it doesn’t need, or bring in resources where it needs them and make that more efficient.
Here, you have a lot of structural bottlenecks, as the cost of bringing in or taking out an asset is very high because of stamp duties. The cost of bringing in or taking out labour from a business is also very high. On capital, you can bring in or take out, but you have dividend distribution tax.
P/E expansion then?
If you see where price to earnings (P/E) multiples are over the long-term (last 10 years’ average), and you look at where they are today, markets are still trading at a premium over the long-term. The last two to three years were a bubble. It’s not a reality. If you’re trading at a premium to the long-term reality, then no returns are going to come from there.
Only hope: special situations.
Special situations are alive and well. These happen when a business is being particularly badly run. Then you (an investor) get in, intervene and you fix it. That will happen when there is a corporate governance arbitrage, where the owners have not been fair to their shareholders, and you come in as private equity, and just be fair.
All drivers of growth together, but….
The last option is if you can get a conjunction of some components of all these drivers, that would be an opportunity (to invest). But then again, when you’re looking for four or five drivers of returns to meet your cost of capital, then the opportunity set available comes down sharply.
No predictability of long term outcome.
To be able to invest long-term capital, you need some amount of predictability of longer term outcomes. If you look at longer term outcomes, we are running a huge fiscal deficit. Is it an Indian problem? No, the US is doing it, the UK is doing it, and there is no guarantee how many more countries won’t do it.
Make the darn cake larger.
In a country like India, financial engineering is overrated. Here, you have to focus on making the cake larger. Trying to find sophisticated financial ways in which you can make your share of the cake larger is setting yourself up for disputes. Make the darn cake larger; stop fighting about share of cake. If it’s larger for everybody, everybody wins. Make the companies larger, make them more profitable, and there’ll be enough to go around.
The West is not going to recover in a hurry.
The probability of a recovery in the West in short term is low. Fundamentally, the West is living beyond its means. If you want to re-establish equilibrium, you have to get them to live within their means, which means they consume less. Whichever way you look at it, it’s not going to recover to where it was, suddenly. And if it doesn’t recover, then that incremental demand fillip for exporting your way out of a domestic problem is not available.
Back to basics.
Private equity essentially brings an organized, efficient managerial paradigm, to young companies. It helps them attract talent, identify long term opportunities, right resources, align the incentive structures against those resources, maintain good governance practices, and so on. The focus on basics has to increase dramatically because it’s easy to jump in when P/Es are expanding because that’s going to give you returns.
Private equity will go through a natural process of cleansing. You will also see a lot of pain and cleansing of international firms, who were very big in the leveraged buyout business. There is so much leverage in their portfolio companies.
Driving returns by simply increasing leverage is a fantastic thing to do in a bull market. You don’t ever face the cost of the consequences of that cost. In a bear market, you get leveraged loss also.
Leveraged buyout shops from the US to India. Why?
I find it quite amazing (that they are setting up here). When I read articles about their intents, etc., my summary of what they seem to be saying is that “we have problems in our home markets, there is a crisis, there is an issue with our business model, therefore we will go to India”.
I wouldn’t call it a positive vote on India. It’s more like saying “I don’t know what’s going on in my home base, let me go to some other market.”
Private equity will not get capital, but India may.
The GDPs in the West are shrinking. If you look at relative returns, India might actually be a better place (for investments).
For private equity, will India be more attractive? Yes. Will private equity as an asset class get more capital? No. Because the LPs (limited partners) will look at debt and say they can get 25% debt of some municipal corporation of some part of the US, so why would they put money in private equity? The asset allocation there will shift out of private equity into distressed debt. The likes of pension funds and endowments have prioritised their relationships. They’ve decided on who they want to stick with and who they don’t. I think we (Baring) have the good fortune at this moment of being on their priority list. We are not facing any issue (redemption pressures, etc). But can I sit here and say that there won’t be an issue tomorrow or day after? If there is a global contagion of this nature, you have to assume that you will get hurt somewhere.
| 2009-04-05 22:44
APRIL 5, 2009, 8:01 P.M. ET
Financial News: Barclays Cleared For Spinoff Of Buyout Arm
Barclays Private Equity, the top-performing, in-house buyout division of Barclays Bank, has received approval from its third-party investors to spin off from its parent before its fourth fund is raised next year.
However, the U.K.-based bank, which also started exclusive talks to sell its exchange-traded fund manager iShares to buyout firm CVC Capital Partners last week, has yet to agree a deal. A Barclays spokesman declined to comment.
Roger Jenkins, chief executive of the investment banking subsidiary of Barclays Capital's principal investments arm, has been leading the negotiations with regional co-heads of Barclays Private Equity Paul Goodson (UK), Gonzague de Blignieres (France) and Peter Hammermann (Germany) representing the three offices planning the spinoff.
Jenkins and Goodson reportedly met with third-party investors in Barclays Private Equity's funds in late December to discuss strategic options for the group but a source with knowledge of the talks between the bank and its funds' external investors said an indicative agreement to support a spinoff had been given within the past two weeks.
A large investor in the arm's first three funds said: "Barclays Private Equity contacted us and our understanding is there is a general willingness to go down this route, but the hows and terms have not been agreed."
Barclays Bank has been contributing less of its balance sheet to supporting Barclays Private Equity funds, having moved from committing about half the total raised for its first fund to EUR650 million of the EUR2.4 billion in fund III closed in August 2007. External investors in Barclays Private Equity Fund III are some of the world's leading managers of funds of funds. All those contacted declined to comment.
Web site: www.efinancialnews.com
| 2009-04-05 20:01
Japan Venture Capital Funds Facing Mergers as IPOs Disappear
By Patrick Rial and Kotaro Tsunetomi
April 6 (Bloomberg) -- Japanese funds that buy stakes in start-up companies are struggling to survive amid the worst market for initial offerings in 17 years, Kazuhiko Tokita, chairman of the Japan Venture Capital Association, said.
Only 49 companies went public last year, the fewest since 1992, depriving venture firms of the source of 45 percent of revenue and 90 percent of profits, based on data from 2007. The investors are likely to pool their holdings to create bigger stakes so they can pressure companies to merge or buy back stock, Tokita said.
“The industry needs to gather its power during this ice age, and that means combining,” said Tokita, a former director of Mitsubishi UFJ Financial Group Inc.’s venture capital unit. He predicts funds will lose money this year and possibly next. “When this is finished, what’s left standing will be the real venture capitalists.”
The country’s three biggest firms saw two years of profits wiped out since April 2008 as Japan’s economy shrank at a 12.1 percent rate in the fourth quarter, according to data compiled by the Venture Enterprise Center and Bloomberg. Japanese funds, which together manage 1.04 trillion yen ($10.6 billion), get more than twice as much revenue from IPOs as U.S. and European firms, according to Venture Enterprise.
Tokita’s group will hold a meeting for more than 100 members this month to facilitate merger negotiations and collaboration on investment stakes, he said.
The inability to take companies public is reducing new investments, starving start-up businesses of capital. Smaller companies, which employ about 70 percent of Japan’s workforce, said financing is the hardest to get in at least 23 years, according to a survey published by Shoko Chukin Bank on Feb. 25.
Of the 936 companies that went public in Japan from 2002 to 2008, 62 percent were backed by venture funds, data from the JVCA shows.
“The drain on available funds is a real concern,” Venture Enterprise wrote in a report. “Venture firms are Japan’s drivers of industrial competitiveness and economic activity.”
The venture units of Shinko Securities Co., Dai-Ichi Mutual Life Insurance Co. and asset manager Diam Co. merged in February 2008. Meiji Capital was acquired by Yasuda Enterprise Development on April 1.
“Funds that can’t break even in this environment will be forced to exit,” said Shinichi Fuki, executive managing director of Jafco Co., the largest venture investor. “There’s been talk that some players will be pushed into mergers, and I’ve got a strong feeling that’s what’s going to happen.”
IPOs slumped as the deepening global recession dragged the Nikkei 225 Stock Average to the lowest level in 26 years.
The 49 IPOs last year was less than a third of 2006’s level, according to data compiled by Bloomberg. This year, no companies listed in January or February for the first time since at least 1999.
Profitability of IPOs is also declining. The first four companies that sold stock this year priced shares at an average of 7.9 times annual earnings, compared with 15 times in 2008.
The IPO “business model is dead,” said Hiroshi Matsumura, director of the VEC. “Those who can’t successfully diversify their exit strategies won’t survive.”
Jafco, Daiwa SMBC Capital Co. and Japan Asia Investment Co., the country’s three largest venture firms, reported combined losses of 25.6 billion yen ($260 million) for the first nine months of the fiscal year ended March, compared with total profit of 22.9 billion yen for 2006 and 2007.
Jafco lost 851 million yen in the period. Daiwa SMBC reported a 5.1 billion yen loss in the same period, while Japan Asia Investment suffered a 19.6 billion yen decline. Their shares slumped more than 10 percent this year, trailing the Topix index’s 3.2 percent decline.
Besides IPOs, venture funds make money when companies they invest in merge, repurchase stock, or sell units to other funds or companies. Management buybacks, where executives repurchase shares from venture capital firms, and liquidations made up 37 percent of Japanese venture fund revenue in 2007, VEC data showed.
Mergers accounted for 16 percent of revenue and 1.9 percent of profit, with other strategies making up the remainder, according to the VEC.
Stakes owned by Japanese funds are too small to force acquisitions, the JVCA’s Tokita said. Pooling holdings would give them new ways to profit, he said.
“Our industry is in a race for survival on a global level; we’ve been hit by a giant tsunami,” Fuki said. “VC firms that aren’t able to raise funds and continue investing when prices are low aren’t going to make it. The need for fund consolidation is not something I can deny.”
To contact the reporters for this story: Patrick Rial in Tokyo at email@example.com; Kotaro Tsunetomi in Tokyo at firstname.lastname@example.org.
Last Updated: April 5, 2009 11:58 EDT
| 2009-04-05 11:58
Fri Apr 3, 2009 9:01pm EDT
Can private equity play the infrastructure game?
Until recently, aging infrastructure assets looked about as tantalizing to private equity investors as a bunch of trees. The comparison isn't far-fetched. The long-dated, low rates of return that infrastructure assets produce may be marginally better than the low single-digit returns that timberlands might yield after 40 years. Which is why U.S. buyout executives, hard-wired for high risk-reward bets, were less than enthused.
That mindset has changed the past few years. Five years ago, the city of Chicago sold a 99-year lease to Cintra, Concesiones de Infraestructuras de Transporte SA of Spain and Australia's Macquarie Infrastructure Group for $1.8 billion, giving the investors the right to operate the Chicago Skyway toll bridge. Many viewed the highway and bridge as a landmark event for privatization in the U.S., which has lagged Europe and Australia. Faced with crippling deficits and budgetary pressures, federal, state and local governments have increasingly turned to private capital to fill the funding gap for much-needed infrastructure improvements.
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Robust credit markets also whetted investors' appetites for steady, long-term investments that with financial engineering could yield better-than-average returns for infrastructure. Macquarie was the category killer that established the listed fund model at least a decade earlier.
Since then, the ranks of private infrastructure funds have swelled, drawing in Washington's Carlyle Group, 3i Group plc of London, Swedish private equity firm EQT Partners and several bank-sponsored and independent players. However, competition has also increased, and players have tried to boost investment returns by using more leverage.
"If you build it, they will come"
Funds raised globally for infrastructure investments
Year Funds raised ($bill.)
Source: Probitas Partners
With the global financial crisis and credit markets effectively stalled, infrastructure dealmaking -- often complex, multiparty transactions to begin with -- has become even more complicated. Political resistance is alive and well. The Pennsylvania legislature's recent rejection of a $12.8 billion turnpike concession sale underscores how American communities, and entrenched interests, are not eager to just hand critical assets over to private hands.
Lack of leverage also upended the debt-equity calculus. Listed infrastructure funds that relied on excessive leverage saw value vanish, leaving at least three Australian groups in receivership and the so-called Macquarie model in tatters.
Tight liquidity has derailed fundraising, not just for infrastructure vehicles, at least for the near term, experts say. New entrants, including New York's Kohlberg Kravis Roberts & Co. and Blackstone Group LP, both in the market with their first infrastructure funds, face recalcitrant institutional investors, many of whom are constrained by the denominator effect of sunken market values.
Moreover, experts believe leveraged buyout impresarios will need to offer more than financial alchemy to compete with project finance specialists. Of particular concern to limited partners is the matter of the PE model's economics -- 2% management fee and 20% carry -- broadly at odds with the less robust, low-return risk profile that infrastructure offers, observers say. That "long-term" investments for some PE funds may mean a holding period of less than five years has not have been lost on pension funds, either.
There are tensions between the low, steady-returns profile that institutional investors are attracted to and the classic PE fund structure, say investment bankers and placement agents. Thus, the PE model needs to evolve.
To some extent, that's now happening. KKR rocked the fundraising establishment by halving its fee and carry structure to 1% and 10% when it launched its fund last year. "To me, that tells you everything you need to know about returns expectations from infrastructure and where investors stand," says one fund manager who requested anonymity.
All this suggests private capital has a way to go. To be sure, the financial crisis may have only strengthened the impetus for privatization. There are those who note that after past excesses, lack of leverage may not be such a bad thing, particularly if investors focus on improving performance and enhancing asset value. Yet it remains to be seen whether private equity can play an effective, sustainable role.
If there are two people Chicago can point to as its biggest privatization advocates, they are Mayor Richard M. Daley and John Schmidt. Longtime Daley friend Schmidt, a partner at Mayer Brown LLP, had championed Skyway's privatization effort since 2002. Daley had in mind a concession sale of the Skyway system similar to Ontario's privatized concession to operate the 407 Express Toll Route for 99 years.
The Skyway is an eight-mile, six-lane, elevated roadway over the South Side of Chicago that includes a small steel truss bridge over the Calumet River. Opened to traffic in 1959, it had been a financial disaster and had been undergoing rehabilitation for years. For a time it enjoyed a reputation as a choice spot for gangland-style robberies, including a picaresque extortionist who held up tollbooths using different clients' vehicles from his backyard car repair service.
The avuncular Schmidt, now in his mid-60s, was Daley's first chief of staff after his initial election as mayor in 1989. In late 2004, Schmidt, serving as Chicago's legal adviser, sat alongside other city officials and representatives of adviser Goldman, Sachs & Co. at the opening of bids for Skyway.
"They opened the envelopes, sort of in reverse order," Schmidt recalls. The first one, from Abertis Infraestructuras SA of Spain, came in at $505 million. The second, from an ABN Amro-led group, was $770 million. Both were considerably below expectations. Then the Cintra-Macquarie bid was opened; it was for $1.82 billion, $1.1 billion more than the next-highest offer. "I said, 'Let me see that. Are we reading it correctly?' " he says.
Schmidt calls it an emotional moment. "I knew something extraordinary had happened," he says.
Under the 99-year concession agreement, the winners received exclusive rights to operate and collect toll revenue from the Skyway and be responsible for maintenance. As Daley envisioned, the proceeds were to be used to pay off Skyway debt and create a reserve trust.
Even before the Skyway deal had closed, Indiana was considering a similar project for the Indiana Toll Road, a 157-mile highway linking the Midwest and East Coast, one of the most heavily traveled truck routes in the U.S. In 2006, the state awarded the same consortium a $3.8 billion concession to operate the highway for 75 years. Different deals have been struck elsewhere, including Florida's agreement in March to pay a group led by Madrid-based Actividades de Construcción y Servicios SA as much as $1.8 billion over 35 years to design, build, operate and maintain new toll lanes along Interstate 595. Florida will set toll rates and pocket the revenue.
Have the floodgates opened, or are investors and advisers indulging in wishful thinking? Opinion is split. In the U.S. alone, the amount of money needed to fix public works is breathtaking. The American Society of Civil Engineers recently warned that after decades of underfunding and neglect, roughly $2.2 trillion will be needed over the next five years to improve the nation's infrastructure to acceptable standards. Globally, according to a recent Overseas Economic Cooperation Fund study, $2 trillion is needed annually for electricity transmission and distribution, road and rail transport, telecommunication and water through 2030.
The Obama administration's stimulus package and other legislative initiatives, including the creation of a National Infrastructure Reinvestment Bank, have dangled the promise of federal support, but the dollar commitments to date appear to be a trickle compared with the need.
Political resistance hasn't disappeared. In October, a much-publicized bid to privatize the Pennsylvania Turnpike for a $12.8 billion, 75-year lease, won by a consortium led by Citigroup Inc.'s Citi Infrastructure Investors arm and Abertis didn't pass legislative muster, a major setback for the bidders. Members of the legislature and other opponents appeared reluctant to forge ahead, partly because many were convinced the winning bidders would need to hike toll rates to recoup operating expenses and the sizable lease cost to generate a return. There was also fierce opposition from the Turnpike Commission, which has been running it for 70 years.
Citi and Abertis said they're not giving up yet and will likely try again.
"Buyout firms will have to pay careful attention to aligning their business models to public policy and community interests," says one private equity executive. Infrastructure assets are "so core to many people lives" that heightened sensitivity is essential.
Dealmaking has also slowed because infrastructure assets are not immune from a downturn, as some might want to believe. While it's unlikely that a household will cut back on its use of water, drivers might well avoid toll bridges and roads, says Ben Heap, co-head of infrastructure at UBS. Toll traffic has fallen by as much as 10% in some cases, he says.
Making matters worse, price hikes are based solely on inflation, which hasn't been this low in 50 years. "So there's a little bit of a double whammy," Heap says.
In the U.S., privatization of large-scale structures such as toll roads, airports, seaports and bridges has been slow to gain adherents. For much of the past few decades, government agencies relied on tax-exempt bonds to build and repair structures. Except for some municipal water supply, sanitation services and telecom that have been turned over to private contractors, these assets have mostly stayed within the public domain.
In Europe, pieces of infrastructure have been fully or partly privatized since the '80s. The OECD estimates that privatized assets now exceed $1 trillion for member countries. Various forms of public-private partnerships have developed. Typically, the public agency owner and provider of services becomes purchaser and regulator, while the private sector provides finance and management of assets while generating returns. In the U.K., more than 900 such partnerships, valued at £53 billion ($76 billion) have been signed from the mid-'90s to the end of 2007, the study says.
The model for infrastructure funds was pioneered in Australia by Macquarie, whose antecedents were in merchant banking. In the '90s, it capitalized on capital flows from Australia's pension schemes, known as superannuation funds, and set up infrastructure funds, many of which were publicly traded entities.
In Canada, pensions also began investing in infrastructure but went a step further, embarking on co-investments and direct investments. The Ontario Teachers' Pension Plan began investing in 2001, mostly as a direct investor. It had C$8.8 billion ($7 billion) in its global infrastructure portfolio as of end-December 2007, out of a total C$108.5 billion.
The Ontario Municipal Employees Retirement System established a subsidiary, Borealis Infrastructure Management Inc., in 1998. The unit, now with C$5.2 billion of assets, aims to have as much as $10 billion in its portfolio, with 60% of the capital in Canada, the rest primarily in the U.K., Western Europe and the U.S.
"The natural owner of an infrastructure asset is a pension or endowment fund that intends to hold the asset indefinitely," argues Leo de Bever, CEO of Alberta Investment Management Corp., in a recent essay in Infrastructure Investor, a PEI Media trade publication.
De Bever is one of the more outspoken apostles for direct infrastructure investments, recently publishing a book on the topic. AIMCo of Edmonton, Alberta, was established in 2008 to manage C$70 billion in pension assets.
Infrastructure is only now emerging as a distinct asset class. For pension funds, it's a perfect way to match long-term funding liabilities with long-term cash flows that infrastructure assets typically generate. "Money wants to find a home, and infrastructure is one of those areas offering investors legitimate gains," says Tony Perricone, a partner at Jones Day.
Last year, the California Public Employees' Retirement System, which used to lump its infrastructure investments with other alternative assets such as private equity, said it would allocate up to 3%, or about $7.2 billion, for infrastructure, with a net target return of 5% above inflation over five years. "We hope to generate stable, attractive investment returns with low to moderate risk as we deploy capital to meet a reported need of $1.6 trillion for U.S. infrastructure projects over the next five years," Rob Feckner, CalPERS board president, said at the time.
The California State Teachers' Retirement System also has a new policy in place, though it has yet to make an investment. Other states including Alaska, California, Oregon, Texas and Washington appear to be diving in as well.
Despite transactions having mostly been private-to-private deals to date, the surge in interest in infrastructure has sparked a fundraising frenzy. Even with liquidity constraining many large pension funds, private infrastructure pools raised nearly $25 billion last year. The total fell short of the record $34.3 billion raised in 2007 but still outpaced 2006, according to investment advisory firm Probitas Partners.
About 77 infrastructure funds globally are seeking an estimated $92 billion of commitments from institutions. The pace has been glacial, bankers and lawyers say, and raising all of it isn't a sure bet. "Fundraising has slowed tremendously, though unlike megabuyouts, there's still a fair amount of money going into infrastructure," says Kelly Deponte, managing director at Probitas. "Pension funds are looking at the demand side of the equation."
Braving the economic turmoil
Top 10 infrastructure funds now in the market
Rank Fund Fund manager Manager country Size ($mill.)
1 GS Infrastructure Partners II GS Infrastructure Investment Group U.S. $7,500
2 Macquarie European Infrastructure Fund III Macquarie Funds Group Australia 6,691
3 Macquarie Infrastructure Partners II Macquarie Funds Group Australia 6,000
4 Citi Infrastructure Partners Citigroup Infrastructure Investors U.S. 4,000
KKR Infrastructure Fund Kohlberg Kravis Roberts & Co. U.S. 4,000
5 Alinda Infrastructure Fund II Alinda Capital Partners LLC U.S. 3,000
6 aAIM Infrastructure Fund aAIM Infrastructure U.K. 2,982
7 Fondi Italiani Per Le Infrastrutture F2i SGR Italy 2,704
8 CVC European Infrastructure Fund CVC Infrastructure U.K. 2,676
9 Santander Infrastructure Fund II Santander Infrastructure Capital U.K. 2,007
10 Gulf One Infrastructure Fund I Gulf One Bahrain 2,000
| 2009-04-03 21:01
US hedge fund Harbinger swings to gains, hires COO
Fri Apr 3, 2009 3:16pm EDT
By Svea Herbst-Bayliss
BOSTON, April 3 (Reuters) - Hedge fund firm Harbinger Capital Partners LLC swung into the black with investors saying the flagship fund gained between 6 and 8 percent in the first quarter.
That is good news for the New York-based firm, run by Philip Falcone, and its clients after Harbinger Capital Partners Fund I lost roughly 28 percent last year.
That is more than the average hedge fund portfolio's roughly 19 percent loss, but less than the Standard & Poor's 500 Index 38.48 percent drop.
For Harbinger, which had posted gains every year until 2008, the drop stands in sharp contrast with the fund's 116.1 percent gain in 2007 and its 20 percent annualized return since the fund was launched in 2001.
The performance numbers coincide with other changes at the fund firm this spring.
Shareholders agreed on new redemption guidelines that will help preserve capitaland allow managers to invest in credit markets during the current distressed cycle.
Falcone is also starting a fund to buy credit-default swaps and bonds.
Many investors punished hedge funds for their worst-ever returns and demanded their money back last year. Harbinger structured withdrawals to include cash and private equity holdings.
Also this week Peter Jenson started work as Harbinger's chief operating officer where he is to build an institutional infrastructure at the $7 billion fund firm, according to sources not authorized to talk about the matter publicly. Jenson previously worked as controller at Chicago-based Citadel Investment Group LLC.
There will be no change to Harbinger's roughly 25-person investment team, the sources said.
Jenson was brought on after Harbinger severed its ties with Harbert Management Corp earlier this year. Harbert had helped Falcone get started in the business.
Charles Zehren, a spokesman for Harbinger, declined to comment on the changes.
Some investors described the split as amicable and aimed at consolidating Harbinger's operations in New York. (Reporting by Svea Herbst-Bayliss, editing by Leslie Gevirtz)
| 2009-04-03 15:16
Wisdom of Japan Hedge Fund Returns 2% on Taiyo Yuden, Nipponkoa
By Tomoko Yamazaki and Komaki Ito
April 3 (Bloomberg) -- Tadashi Mukai, returning to run his own his hedge fund after being the nation’s top performer in 2007, posted a 2.1 percent gain in March for his Wisdom of Japan Fund by betting on rising and falling stock prices.
The Epic Partners Investments Co. fund, which employs a so- called market-neutral strategy, doubled initial assets to 850 million yen ($8.5 million) since starting March 2, according to Mukai. The 44-year-old, who joined Epic in August and has managed market-neutral funds for eight years, aims to raise 10 billion yen from investors for the fund within a year.
Buying shares of electronic components maker Taiyo Yuden Co. and selling those of casualty insurer Nipponkoa Insurance Co. were the biggest contributors to his performance in March.
“Market-neutral funds focused on Japanese stocks are all about diversification, so you are pretty much hedged for any sort of unexpected events like a missile from North Korea or some natural disaster like an earthquake,” Mukai said in an interview in Tokyo yesterday.
The gain by the fund, whose investors are all wealthy individuals in Japan, compares with an average 0.4 percent decline by the Eurekahedge Japan Hedge Fund Index, based on preliminary figures.
Mukai’s investment process begins by whittling down Japan’s 4,000 publicly traded companies to the 1,200 stocks that trade the most. He then invests in about 300 stocks with almost equal holdings of long and short positions.
In a short position, an investor sells borrowed shares, hoping to profit once prices decline by buying them back at a lower price. Market-neutral funds seek to profit from both rising and falling prices by matching long and short positions in different stocks to boost returns.
Mukai based his purchase of Taiyo Yuden shares on the views of Takumi Sado, a Daiwa Institute of Research analyst who on Feb. 22 made the company his top pick, arguing that risks linked to inventory levels weren’t as great as the stock price indicated. The company surged 26 percent in Tokyo trading in March.
For his short position, he sold Nipponkoa, which announced plans to merge with Sompo Japan Insurance Co. on March 13. Mukai followed the advice of JPMorgan Chase & Co. analyst Natsumu Tsujino, who cut her recommendation on the stock to “underweight” from “neutral” on the day of the announcement, saying Nipponkoa was overvalued, even after a merger. Nipponkoa slid 23 percent in March.
Mukai is forecasting some declines in stocks in April as companies start reporting earnings for the fiscal year ended March 31 and providing guidance for the next 12 months.
“We’ve seen some stocks that have simply rallied without any fundamental reasons,” Mukai said. “When we get the earnings at the end of the month, that will give us a reality check, creating opportunities on the downside.”
In 2007, Mukai ran the UMJ Neutro Fund at United Managers, which climbed 11 percent, the biggest return among 13 Japan- focused market-neutral funds, according to data compiled by AsiaHedge.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their investments.
To contact the reporters on this story: Tomoko Yamazaki in Tokyo at email@example.com; Komaki Ito in Tokyo at firstname.lastname@example.org
Last Updated: April 2, 2009 21:54 EDT
| 2009-04-02 21:54
Write-up of Japan Achievement Awards 2008, day 2
By Dan Slater | 6 March 2009
Read this article online at:
Here are the details of our Japan Deal Awards for 2008, which were announced in February. A write-up of our House Awards was published yesterday.
DEAL OF THE YEAR
Takeda Pharmaceutical's $8.5 billion acquisition of the US's Millennium Pharmaceuticals
Acquirer adviser: UBS Investment Bank
Target adviser: Goldman Sachs
This was a deal which simply ticked all the right boxes in a very complete manner. It was the biggest deal of the year, it made excellent strategic sense and it was flawlessly executed. It also makes sense for the deal of the year to come from the pharmaceutical sector this year, as this sector saw the greatest level of cross-border activity. This deal enables an industry-leading Japanese company (Takeda) to widen its expertise to include anti-cancer drugs, an area of special expertise at Millennium. The acquisition is extremely complementary to Takeda's core business in Japan and will be of clear benefit to shareholders.
Seven Bank's $486 million IPO
Lead managers: Morgan Stanley, Nikko Citigroup, Nomura.
Seven Bank was the largest offering out of the Japanese IPO market last year, and it was a deal worth waiting for -- the biggest since the IPO of Sony Financial in October 2007. The marketing was excellent, with the leads emphasising that the company was not in fact a bank in the normal sense of the world: it is actually an ATM servicing company. Given the poor sentiment prevailing at the time towards financial institutions, the approach made absolute sense. Execution was spotless with the retail and institutional tranches both heavily oversubscribed. The icing on the cake was the fact that the stock traded up in the secondary market -- at a very difficult time for the stock market. It's a pity there weren't more deals just like it.
BEST SECONDARY EQUITY OFFERING
Mitsubishi UFJ Financial Group's $4.5 billion follow-on
Lead managers: J.P. Morgan, Mitsubishi UFJ Securities, Morgan Stanley, Nomura.
This was an incredible transaction by any standards: the biggest follow-on of the year, it enabled MUFG to obtain essential capital at an extremely difficult time for the banking sector. It also helped to lay the basis for the group's acquisition of a path-breaking 22% stake in Morgan Stanley. Interestingly, the deal was also successfully marketed to US retail investors. Since this deal, it has become clear that the banks which did not tap the markets early will suffer for it, so credit to MUFG for getting in first. The deal also traded up in the after-market. This was a transaction with 'historic' written all over it.
BEST M&A DEAL
Takeda Pharmaceuticals' $8.5 billion acquisition of Millennium Pharmaceuticals
Acquirer adviser: UBS Investment Bank
Target adviser: Goldman Sachs
See write-up above under Deal of the Year.
BEST PRIVATE EQUITY DEAL
Carlyle Group's $560 million acquisition of NH Techno Glass
Acquirer adviser: Merrill Lynch
Target adviser: UBS Investment Bank
The demand for LCD TVs is huge, and this deal represented a bold move by Japan veterans the Carlyle Group to capitalise on the market. The second half of last year was not a great time for private equity, but decent deals could still get done, and this has all the hallmarks of such a deal. NH Techno, a maker of glass substrates for liquid crystal displays, was a 50-50 joint venture between Nippon Sheet Glass and HOYA Corporation. Following the transaction, it will be majority owned by Carlyle with HOYA as a strategic partner with a minority stake. The deal closed in the nick of time, in the summer of last year, just as the financing markets became trickier. The deal features a rare alliance between the sponsor and a strategic investor (HOYA). When exit opportunities begin to improve again, this company should go to the head of the queue.
BEST INTERNATIONAL BOND
Sumitomo Mitsui Financial Group's $1.8 billion preferred share issue
Lead managers: Daiwa Securities SMBC, Goldman Sachs, J.P. Morgan, UBS Investment Bank
Another important deal, expertly executed in very tough markets was the Sumitomo Mitsui Financial Group $1.8 billion retail Tier 1 offering, which priced in May last year. The leads managed to generate great momentum, and the deal priced tight to the range, generating a book of almost $5 billion from close to 200 accounts: a tribute to the leads in a market which was showing increasing volatility and where competing supply complicated the deal. The deal ended up going 48% to Asia, 49% to Europe, Middle East and Africa (EMEA) with the balance to other regions. The success of the marketing of the retail tranche was reflected in the fact that 68% of the deal went to retail investors.
BEST SAMURAI BOND
Westpac Bank's ¥245 billion multi-tranche offering
Lead managers: Daiwa Securities SMBC, Nikko Citigroup, Nomura
Lead manager on euro-yen tranche: Nikko Citigroup
This was a great deal which came to the rescue of the Samurai market after a period where it looked as if it might be closed for ever. This was the deal which brought the market 'back from the dead', after shocked Japanese institutional investors witnessed foreign blue chip Samurai issuers suffer grievously in the credit crunch. But the Westpac deal was carefully crafted to overcome investors' fears, with the Australian government attaching a guarantee to the deal. That guarantee was sufficient to convince investors, and the Samurai market has now been reopened, although in a somewhat more demanding form than previously.
BEST EQUITY-LINKED DEAL
Yamada Denki's $1.4 billion convertible bond
Lead manager: Nomura
When deals go wrong in the Japanese markets, they often seem to be convertible bonds. But this deal, one of the largest of the year, was an excellent reflection of Nomura's capabilities in the area. Electronics retailer Yamada Denki's issue was well priced -- at a good premium to reduce dilution -- and generated strong demand. The deal (the proceeds of which were used for a share buyback) was so successful in fact, that many believed it would trigger a spate of copy cat deals. Given the keen pricing, excellent marketing and execution, and the fact that it was shareholder-friendly, it's not hard to see why.
BEST SECURITISATION DEAL
¥72.7 billion Shinsei Bank Headquarters Building securitisation (J-CORE 15)
Lead manager: Deutsche Bank AG Tokyo Branch
This was surely one of the most dramatic, difficult and speedy deals of the year. Shinsei Bank was keen to offload its headquarters to help its earnings figures and Deutsche Bank was chosen for its ability to carry out a fast and effective deal. This was financing at its best: -- the use of a difficult technique in a skilful manner to help a client under some stress. It was a risky deal for Deutsche Bank, too, but they carried it off with real panache.
MOST INNOVATIVE DEAL
World Bank's $25 million Certified Emission Reduction-linked CO2L Uridashi Bond
Lead manager: Daiwa Securities SMBC
Aimed at Japanese investors, this bond combined the laudable aim of 'saving the planet' with sophisticated financing techniques. The US dollar-denominated bond offered principal protection with a fixed rate coupon, which was then followed by a coupon linked to the performance of CER (Certified Emission Reduction, a unit representing one tonne of CO2 equivalent) market prices. It is good to see financial techniques combined with climate-saving techniques being made more familiar and transparent to investors, which makes this deal a worthy winner of the most innovative deal category.
© Haymarket Media Limited. All rights reserved.
| 2009-03-06 00:00
Hedge funds likely fell in February as big names slip
Thu Mar 5, 2009 7:38pm EST
By Svea Herbst-Bayliss
BOSTON (Reuters) - Hedge fund investors likely lost money again in February as some high profile managers, including John Paulson, reported small declines.
Paulson, who correctly predicted the subprime crisis, saw his $3.5 billion Paulson Credit Opportunities fund and his $2.3 billion Paulson Credit Opportunities II slip 0.93 percent each in February, people who saw the funds' numbers said.
Since January, these funds are up only a smidgen, disappointing investors who still swoon over their 589.62 percent and 351.72 percent returns, respectively, in 2007.
For investors in activist manager William Ackman's fund that bets exclusively on retailer Target (TGT.N: Quote, Profile, Research, Stock Buzz), February brought more bad news with the fund off 33 percent after having lost 40 percent in January, people familiar with the numbers said.
William von Mueffling's well-respected $1.8 billion Cantillon World Ltd fund was down 2.19 percent in February even though the fund is up 7.55 percent year-to-date.
Mark Mobius' $1.3 billion Templeton Emerging Market fund lost 0.88 percent last month, putting it down 13.13 percent for the year.
James Palotta, who split from Tudor Investments and is now running his own firm, said his fund was off 2.15 percent in February, leaving it off 2.47 percent for the year.
And Paul Tudor Jones' $6.8 billion Tudor B.V.I. Global Fund inched up 1.71 percent in February, leaving it up 4.61 percent year-to-date.
Overall the average hedge fund will likely be down slightly in February after having gained about 1 percent in January, industry analysts who track performance said on Thursday.
Trackers like Hedge Fund Research and Hennessee Group will begin to release their numbers in the coming days.
Even though these loosely regulated portfolios again outperformed the broader Standard & Poor's 500 stock index, industry analysts said these numbers and overall nervousness about stumbling markets will prompt investors to keep pulling money out of the once red-hot asset class.
"We expect that there were more outflows in February," said Conrad Gann, president of research group TrimTabs. "We are seeing money flow out of the market on all sides -- mutual funds, exchange traded funds and hedge funds," he added.
In January, TrimTabs said investors pulled $93 billion out of hedge funds after having pulled out $118 billion in December, which was the bulk of the $167 billion taken out in all of 2008.
Since hedge funds are only loosely regulated they are not required to report performance or assets and so any information on their returns is closely scrutinized.
Even large hedge fund firms like Och-Ziff Capital Management Group LLC (OZM.N: Quote, Profile, Research, Stock Buzz), which manages roughly $22 billion and is one of the few publicly traded hedge fund firms, is bracing for more redemptions.
"We believe the industrywide redemption cycle is not yet over," the company's chief executive officer, Dan Och, said last month after investors pulled an estimated $5.4 billion out of the company last year.
Industry analysts expect global hedge funds, which boasted $1.9 trillion in assets at the start of 2008, to shrink to about $1 trillion this year.
(Editing by Phil Berlowitz)
| 2009-03-05 19:38
Crude May Reach $60 Should OPEC Cut, BlueGold Hedge Fund Says
By Chanyaporn Chanjaroen
March 6 (Bloomberg) -- Oil may rise 37 percent to $60 a barrel should OPEC agree to cut production this month, according to BlueGold Capital Management LLP, the London hedge fund that returned 31 percent this year on energy trades.
The Organization of Petroleum Exporting Countries may agree to reduce output for the fourth time since September at a meeting on March 15 in Vienna to shore up prices that fell as much as 77 percent from a record in July. Crude traded at $43.69 at 5 p.m. in New York yesterday.
“So far OPEC has shown a good compliance on their output cuts and they might be successful in providing a floor to oil prices,” BlueGold Chief Investment Officer Pierre Andurand said in an interview March 4. “Oil prices have a chance to rise to $60 soon if OPEC members carry on showing a high level of compliance and announce another cut.”
Crude rebounded 13 percent in two days this week, partly on speculation OPEC will cut output again. The group, accounting for 40 percent of world supply, may act after the International Energy Agency forecast that demand this year will drop the most since 1982. U.S. crude stockpiles expanded 7.7 percent this year and are near their highest since July 2007.
BlueGold has returned 307 percent since starting in February last year, 32-year-old Andurand said. The money manager began trading oil in 2000 with Goldman Sachs Group Inc.’s J. Aron & Co. unit in Singapore. He co-founded BlueGold with Dennis Crema, 48, who has traded energy for more than two decades.
BlueGold’s assets under management peaked at $1.3 billion in January, falling to $830 million in February as investors sought to raise cash, Andurand said. This year’s performance has increased assets to $1 billion. The fund is seeking additional investment, Andurand said.
The world economic slump is unlikely to end any time soon, the money manager said. Governments and central banks are spending trillions of dollars to combat the worst financial crisis since the Great Depression. More than $31 trillion has been erased from the value of global equities in the past year.
“We are more likely to see deflation than inflation over the next few years,” Andurand said. “It could be a multi-year process with a danger of lasting more than a decade if governments don’t react aggressively enough.”
Hedge funds lost 19 percent on average in 2008, the worst year since Chicago-based Hedge Fund Research started tracking data in 1990. They were little changed in January. BlueGold returned about 16 percent in February.
Hedge funds are private and largely unregulated pools of capital whose managers can buy or sell any assets and make bets on falling as well as rising asset prices and participate substantially in profits from money invested.
To contact the reporter on this story: Chanyaporn Chanjaroen in London at email@example.com
Last Updated: March 5, 2009 19:01 EST
| 2009-03-05 19:01
Apollo may seek control with Harrah's debt offer-KDP
Thu Mar 5, 2009 6:33pm EST
NEW YORK, March 5 (Reuters) - Harrah's Entertainment Inc's proposed debt tender may be an attempt by private equity firm Apollo Global Management to gain more control of the company if it files for bankruptcy protection, KDP Investment Advisors said on Thursday.
Investors including affiliates of private equity firms Apollo and TPG Capital said on Wednesday they were starting a $250 million cash tender offer for debt issued by Harrah's Operating Company. For details, see [ID:nWNAB0441]
Apollo and TPG acquired Harrah's Entertainment HAMLEH.UL in a $31 billion leveraged buyout in early 2008.
Harrah's also commenced an offer to exchange $2.8 billion of debt for new notes due in 2018.
"We find the Apollo new investment to be curious," KDP analyst Barbara Cappaert said in a report on Thursday.
"The investment (at a tender price rumored to be in the high 30s) would give Apollo (if our math is correct) control of up to $675 million face amount of the December issued debt," she said.
"This would represent one-third of those new bonds and that, interestingly enough, would be enough to block any restructuring plan in bankruptcy. It would also put Apollo well ahead of pre-LBO and post LBO unsecured bondholders," she added.
An Apollo spokesman declined comment.
Harrah's, the world's biggest gaming operator, has struggled under its debt load as gaming revenues dry up. The company cut its $24.1 billion debt load by $1.14 billion in a debt exchange completed in January.
Current bondholders may be unwilling to participate in the exchange, Cappaert said.
"We doubt the exchange will be wildly successful. The cash component is still negligible," she said.
Apollo's tender for senior debt issues may also reflect a longer term plan to commence a debt for equity restructuring, or a reorganization in bankruptcy, Cappaert added.
"We think this latest restructuring is an attempt to rearrange the deck chairs on the Titanic," she said.
"The company will very likely throw in the towel and reduce debt via a debt/equity restructuring (or bankruptcy) later this year to streamline its balance sheet. Now with Apollo's interest in the higher tranches of the capital structure, we think this possibility is very real," Cappaert said.
(Reporting by Karen Brettell)
| 2009-03-05 18:33
Happy New Year: Citadel Flagships Up 8%
March 5, 2009
Citadel Investment Group’s flagship hedge funds continued their rebound last month, bringing their returns for the first two months of the year to almost 8%.
The Kensington and Wellington funds returned 2.6% in February, the New York Post reports. The funds rose 5% in January, getting Citadel off on the right foot as it tries to recoup the massive losses suffered by the funds last year. Kensington and Wellington dropped by more than half amidst the economic crisis.
Those huge losses, combined with an avalanche of redemption requests, led Citadel to impose a withdrawal freeze on the funds in December. Last month, in a letter to investors, Citadel founder Kenneth Griffin promised a “distribution program” that would allow investors to get their money out of the funds, albeit very slowly and only when Citadel deems it advisable.
| 2009-03-05 00:00
Bridgewater Tops List of Biggest U.S. Hedge Funds (Update3)
By Saijel Kishan
March 4 (Bloomberg) -- Ray Dalio’s Bridgewater Associates Inc. overtook JPMorgan Chase & Co. to become the biggest U.S. hedge-fund manager, even as the firm lost assets during the industry’s worst year, according to a survey.
Bridgewater, based in Westport, Connecticut, managed $38.6 billion on Jan. 1, down 11 percent from July, according to Absolute Return magazine. New York-based JPMorgan, which owns Highbridge Capital Management LLC, ranked second at $32.9 billion, a decline of 26 percent.
“The bulk of hedge funds were delivering returns that were highly correlated with the market,” said Sharath Sury, chief executive officer of S4 Capital LLC, a Chicago-based firm that advises clients on investing. “So when the markets fell, so did their assets.”
Investment returns dropped an average of 19 percent last year, the most on record, according to data compiled by Chicago- based Hedge Fund Research Inc. Hedge-fund assets shrank to $1.2 trillion at the end of 2008 from the June peak of $1.9 trillion on the market losses and investor withdrawals, according to Morgan Stanley analyst Huw van Steenis in London.
Assets at U.S. hedge funds that managed at least $1 billion each fell 32.3 percent in the second half to $1.1 trillion, according to Absolute Return, which is published by London-based HedgeFund Intelligence Ltd.
Paulson & Co., run by John Paulson, rose to third place from fourth. The New York-based firm’s assets declined 16 percent to $29 billion, according to the magazine.
Bridgewater’s Pure Alpha fund returned 8.68 percent last year, Absolute Return said on its Web site. Highbridge saw assets drop 32 percent in 2008 from the previous year, the bank said during a Feb. 26 investor presentation. Its multistrategy fund lost 27 percent of its value. The bank said its returns improved in early 2009.
The number of hedge fund firms managing more than $1 billion declined 19 percent to 218, according to the magazine.
Baupost Group LLC, a Boston-based hedge fund run by Seth Klarman, gained the most assets in 2008, with money under management rising 49 percent to $16.8 billion, according to the magazine. Farallon Capital Management LLC, a San Francisco-based firm, lost 44.4 percent of its assets last year, the most among all hedge funds, leaving the company with $20 billion, Absolute Return said.
New York state is home to the largest hedge-fund firms, where 121 firms managing a combined $680 billion are based, according to Alpha magazine. Connecticut ranked second with 29 firms overseeing $149 billion in assets, while California was third with 25 hedge-fund companies managing $96 billion.
Top 10 U.S. Hedge-Fund Firms Firm AUM
Bridgewater Associates $38.6
Paulson & Co. $29
D.E. Shaw Group $28.6
Och-Ziff Capital Management $22.1
Soros Fund Management $21
Goldman Sachs Asset Management $20.6*
Farallon Capital Management $20
Renaissance Technologies $20
Barclays Global Investors $17*
*As of Dec. 31. All other figures as of Jan. 1
Source: Absolute Return magazine
To contact the reporter on this story: Saijel Kishan in New York at firstname.lastname@example.org
Last Updated: March 4, 2009 16:18 EST
| 2009-03-04 16:18
Corporate Bond Losses Drive Investors ‘to the Bunker’ (Update3)
By Bryan Keogh
March 3 (Bloomberg) -- Just as investors were gaining confidence in the credit-market recovery, corporate bonds fell last month for the first time since October as the U.S. recession deepened.
The combination of a record $595 billion of bond sales this year in dollars, euros and pounds, the shrinking U.S. economy and increasing costs to bail out the world’s biggest financial companies caused Merrill Lynch & Co.’s U.S. Corporate & High Yield Master Index to decline 1.9 percent in February after gaining 8.8 percent in the previous three months.
While markets improved since the collapse of Lehman Brothers Holdings Inc. in September, yields on corporate bonds relative to government rates are widening at the fastest pace since November and are still five times what they were before the credit crisis began in July 2007. A thaw in credit is critical to an economic recovery in 2010, Federal Reserve Chairman Ben S. Bernanke told lawmakers last week.
It’s time to “go back into the bunker,” said Joseph Balestrino, fixed-income market strategist at Federated Investors Inc. in Pittsburgh, who advises buying longer-term Treasuries and avoiding corporate debt. “We can’t see any bright lights out there. This is a worldwide recession.”
Investors demand 5.64 percentage points more in yield to own investment-grade company bonds rather than Treasuries, up from a four-month low of 5.16 points on Feb. 11, Merrill Lynch index data show.
Companies are paying punitive rates to raise money. Basel, Switzerland-based drugmaker Roche Holding AG sold $32.4 billion of debt last month. The discounts on the debt provided buyers with profits of about $775 million in less than two weeks, according to data compiled by Bloomberg.
U.S. bank bonds are off to their worst start in at least two decades as writedowns and credit losses at financial companies approach almost $1.2 trillion since the start of 2007, according to Merrill Lynch index data. Bank bonds lost 6.32 percent this year, even as the U.S. continues to inject capital into financial firms deemed too big to fail, the data show.
“Financials were so bad that they sort of swamped corporate credit in general,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading for Deutsche Bank AG’s Private Wealth Management unit in New York.
A month ago, investors were talking about a recovery and yield spreads on corporate bonds, which surged to a record 6.56 percentage points on Dec. 5, narrowed, according to the Merrill Lynch indexes.
Bondholders were growing more optimistic the crisis that started in July 2007, when losses in securities related to subprime mortgages pushed spreads up from less than 1 percentage point in the first half of that year, was starting to abate.
The increase in yields compared with Treasuries in February was the first since November, the data show, and shows the struggle Bernanke faces in trying to reduce consumer borrowing costs relative to the rates the government pays.
Thirty-year mortgage rates as measured by Freddie Mac average 2.19 percentage points more than the yield on 10-year Treasury notes, compared with 1.72 percentage points in the decade before the credit crisis began.
“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view - - there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” Bernanke told the Senate Banking Committee on Feb. 24.
The Fed said today its $1 trillion program to prop up the market for auto and business loans will start disbursing funds March 25 and signaled it will use the facility to support an even broader array of credit markets. The central bank is counting on the Term Asset-Backed Securities Loan Facility, or TALF, to help revive lending.
The U.S. economy contracted at a 6.2 percent annual pace in the fourth quarter, the most since 1982. In its latest quarterly outlook, the Fed said it anticipates unemployment will rise to an average rate of 8.5 percent to 8.8 percent in the fourth quarter, from 7.6 percent in January.
Joseph LaVorgna, Frankfurt-based Deutsche Bank chief U.S. economist, said last week a 10 percent contraction this quarter is “conceivable” given job losses and plunging orders for durable goods. Barring major policy changes in Washington, the U.S. recession will “start being called a depression,” said David Malpass, president of New York-based Encima Global LLC and former chief economist at Bear Stearns Cos.
Investment-grade corporate bonds are the next “ugly bubble” as default rates soar and more than half of issuers face multiple ratings cuts, Bob Janjuah, chief credit strategist at Royal Bank of Scotland Group Plc in London, wrote in a report to clients last week.
The world’s largest economy will be “in shambles” this year and “probably well beyond,” billionaire Warren Buffett said on Feb. 28 in his annual letter to shareholders of his Omaha, Nebraska-based Berkshire Hathaway Inc. New York-based American International Group Inc. will get as much as $30 billion in new government capital in a revised bailout after posting the worst loss by a U.S. corporation.
Citigroup Inc. fell more than 50 percent in New York Stock Exchange composite trading after the U.S. government agreed to a third rescue attempt of the New York-based bank in a deal that would bring its stake to 36 percent. The government has injected $45 billion into Citigroup.
Stress in credit markets is reflected in the Libor-OIS spread, which measures the gap between the London interbank offered rate in dollars for three months and the overnight index- swap rate, or what traders expect the Fed’s target rate for overnight loans between banks to average over the term of the contract.
The difference, a measure of banks’ reluctance to lend, widened to 1.02 percentage points, almost a two-month high, from this year’s low of 0.89 percentage point on Jan. 15. Another measure of risk, the gap between what banks and the Treasury pay to borrow for three months, the so-called TED spread, increased to 1.02 percentage points today from 0.91 percentage point on Feb. 10.
The so-called yield curve on financial bonds remains inverted, meaning short-term notes pay a higher rate than longer- term bonds as investors price in the “remote possibility” of near-term defaults, Morgan Stanley analysts led by Rizwan Hussain in New York said in a Feb. 27 report.
Bonds due in one to three years yield about 1.5 percentage points more than debt maturing in seven to 10 years, according to the report.
The costs to protect North American corporate bonds from default is near an 11-week high, according to credit-default swaps. Contracts on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada rose 5.5 basis points to 244.5 basis points as of 5:01 p.m. in New York, according to Phoenix Partners Group. That’s the highest since Dec. 16, according to CMA DataVision.
European speculative-grade debt risk soared to a record today, with the Markit iTraxx Crossover Index of 50 companies rising as much as 20 basis points to 1,130, according to JPMorgan Chase & Co. prices. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Tighter lending standards at banks are cutting into corporate profit, according to Morgan Stanley’s Hussain.
Fourth-quarter earnings for companies in the Standard & Poor’s 500 Index fell 60 percent from a year earlier, the most since Bloomberg began tracking the data in 1998, and have fallen for six straight quarters. Analysts expect earnings to decline 35 percent on average this quarter.
Investment-grade bonds lost 1.6 percent in February after returning 10 percent over the previous three months, Merrill index data show. Spreads on the debt widened 17 basis points to 548 basis points, the first increase since November. Company bonds in Europe also snapped a three-month rally last month, falling 0.3 percent.
“If you have to be in corporates go for higher quality, strong cash-flow generators,” Balestrino said in an interview with Bloomberg Television.
To contact the reporter on this story: Bryan Keogh in New York at email@example.com
Last Updated: March 3, 2009 18:03 EST
| 2009-03-03 18:03
Blackstone Writes Down Four Of Five Funds
March 3, 2009
The Blackstone Group wrote down the value of four out of five private equity funds it manages, according to a letter to investor.
The New York-based p.e. giant, which reported a fourth-quarter loss of $827.1 million last week, did no better by its clients than it did by its investors. Three of the five funds covered by the letter posted double-digit losses last year, Reuters reports, while just one enjoyed a positive return. All told, Blackstone wrote down the value of its p.e. portfolio by 20% in the fourth quarter alone, and 31% on the year.
Blackstone’s $21.7 billion Fund V, which it closed in August 2007, was written down 35%. The $6.45 billion Fund IV fell 20%, while Fund III lost 17%. A communications and media fund fell 48%. The only fund in positive ground last year was Fund II, which rose 2%.
| 2009-03-03 09:35
Hedge Fund Leverage Falls By Half
March 3, 2009
Hedge funds cut leverage by almost half last year, according to new figures from Britain’s financial regulator, and borrowing has fallen even further since then.
Leverage dropped to 1.15 times assets in October, according to the Financial Services Authority. The figure was about 1.9 times in October 2007, and was 1.44 times in April. What’s more, hedge funds cut their borrowing even faster than their lenders required.
The FSA report also shows that hedge funds have more “dry powder” since it began measuring four years ago.
The FSA, which measures leverage in the industry twice annually, surveyed hedge funds managing some US$595 billion in assets, held in 13 banks, from around the world.
| 2009-03-03 09:33
Hedge Funds Lose $158B In 2008
March 3, 2009
The fourth quarter of 2008 saw the largest net hedge fund outflows since 1994, according to a new Lipper Tass report. Outflows rose 689% quarter on quarter to a record US$146.95 billion, confirming the trend started in third quarter 2008.
For all of 2008 net flows to hedge funds amounted to an outflow of US$158.91 billion—an amount more than fourfold the sum of any negative quarterly money flows to the industry since first quarter 1994.
The fourth quarter outflows, combined with the overall broad hedge fund index performance of a loss of 10.21% over the same quarter, produced a decrease in global hedge fund assets from US$1.59 trillion at the end of September to US$1.29 trillion as of the end of December, according to Lipper Tass. Cumulative net outflows suffered by all hedge fund substrategies in 2008 accounted for 11.43% of beginning of year assets, up from 0.86% recorded for the first three quarters.
All hedge fund sub-strategies posted negative money flows in the fourth quarter as the industry all at once faced the collapse of global equity markets, a rise in volatility to record highs, liquidity issues, and the failure of a number of key institutions.
In U.S.-dollar terms, the largest outflows were experienced by long/short equity at US$42.52 billion, managed futures at US$23.95 billion, event-driven at US$22.27 billion, and multi-strategy at US$16.64 billion. Combined outflows across these strategies amounted to US$105.39 billion, or 72% of the overall money flows in the quarter, compared to US$14.61 billion of outflows across the same strategies in the third quarter.
Of the four substrategies posting the largest negative outflows in the fourth quarter, only managed futures had recorded positive inflows for third quarter 2008 (US$1.34 billion).
| 2009-03-03 09:27
Eton Park Makes Big Profit On HSBC Short
March 3, 2009
New York hedge fund Eton Park Capital Management has turned a £160 million (US$226.6 million) profit shorting the shares of one of Britain’s biggest banks.
In a move likely to throw more even more fuel on the anti-short-selling movement in Europe, Eton Park won big betting against HSBC, whose share price fell by more than half between September and this week, when the bank announced plans for a rights issue. The hedge fund has been shorting HSBC for five months.
In the months since the U.K. ended its ban on short-selling financial stocks, several hedge funds have made a killing doing just that. Paulson & Co. made $67 million in just 25 minutes betting against Lloyds Banking Group in February, and in January made a £275 million (US$389.5 million) profit when it covered a short position in the Royal Bank of Scotland. Also in January, Lansdowne Partners disclosed a big short position in Barclays on the day the bank’s shares fell by more than a quarter.
| 2009-03-03 09:24
D.E. Shaw To Appoint Independent Administrators
March 2, 2009
Hedge funds don’t usually concern themselves with existential questions, but in the wake of the Bernard Madoff scandal and a slew of smaller alleged frauds, D.E. Shaw Group is doing just that.
The New York-based firm says it will appoint independent administrators for its funds, and that one of their jobs will be to ensure that its investments actually exist, the Financial Times reports. Investors, especially of the institutional variety, have clamored for U.S.-based hedge funds to hire independent administrators in the wake of Madoff’s arrest, with some threatening to pull their money from firms that fail to do so.
“Up until recently, valuation was the issue investors in alternatives were most focused on,” D.E. Shaw spokesman Darcy Bradbury told the FT. “Now, we’re going beyond that and looking at third-party administration arrangements where an administrator would also substantiate positions and cash balances.”
The court-appointed receiver for Madoff’s firm said recently that is appears that Madoff, accused of defrauding investors of $50 billion, never invested a dime in what authorities call the largest Ponzi scheme in history.
| 2009-03-02 10:30
Andrew Lo on Hedge Fund Regulation
Let's talk hedge fund regulation. What sort of oversight is most appropriate?
We don't need more regulation; we need better regulation. The majority of the problems we see in the current crisis emanated not from the hedge fund industry, but from the banking sector, which is probably the most highly regulated industry in the world. The main theme of my work has been to create more transparency in the financial sector, because one of the problems that arose and is still causing problems in our banking system is the lack of transparency and the fear it breeds. One of the strongest kinds of fear is fear of the unknown. That's exactly where we're at today with people fearing what they don't know about "toxic assets," about defaults, about where some of these pricing models will lead us.
What should a new regulatory framework look like?
The major highlights are relatively straightforward. One is we ought to create some kind of a systemic risk oversight agency. I propose creating something like the National Transportation Safety Board for financial markets.
| 2009-02-27 09:47
The $600 Million Teddy Bear: WG Trading
February 26, 2009
By Bill Singer -- On Feb. 25 the Securities and Exchange Commission issued a 22-page Complaint: Securities and Exchange Commission v. WG Trading Investors, L.P., WG Trading Company, Limited Partnership, Westridge Capital Management, Inc., Paul Greenwood And Stephen Walsh,(Defendants) And Robin Greenwood And Janet Walsh (Relief Defendants).
The SEC characterizes the matter as an "emergency enforcement action to halt ongoing securities fraud involving the misappropriation of hundreds of millions of dollars of investor assets." In reality, the WG Trading case represents yet another long-term fraud (described in the Complaint as dating back to 1996) that went undetected by our nation's many regulators and prosecutors for far too long with disastrous consequences.
Exposure And Enhanced Management
The Defendants are charged with soliciting institutional investors, including educational institutions and public pension/retirement plans, by promising to invest in a so-called "enhanced equity index strategy."
Starting at Paragraph 21, the Complaint details the supposed intricacies of this scam. First off, you got "exposure." Oh, how I love that term of art! Invest with us and we will give you "exposure" to the market. The minute you start hearing such gobbledygook, head for the hills! Nonetheless, like most porn movies, the strategy here involved a lot of exposure to a stock index. The Defendants explained that they would be making purchases of “long positions in equity index futures that provided exposure to the entire index.” Now that's a very difficult market strategy. Hmmm . . . if I buy an S&P 500 index future I get exposure to the entire index. My, what a complicated concept. Sort of like, if I buy one share of Apple stock I get some kind of exposure to... what...no...wait a minute...don't tell me....I'm getting it...it's exposure to an entire share of interest in the Apple company. Right?
If you feel that you understand the arcane exposure strategy, then read on. We are now going to discuss the second prong of Defendants' sophisticated investment plan: the "enhanced cash management." This is a very complex spin on the prior exposure thingy. Here, instead of buying the futures index, the Defendants would sell the index short and buy the underlying index equities. You got that? You sell short the index but also buy the underlying stocks. You do that to lock in a rate of interest. Of course, as part of this super sophisticated exposure and enhanced management technique, the Defendants often took the extreme measure of doing the exact opposite of the complicated sell/buy program. Yes...indeed....they engineered the buy of the index and a sell of the underlying stocks. That's the famed double reverse flip with a half gainer into the index pool.
Getting Stiffed By A Steiff
According to the SEC's Complaint, those Defendants "used client money invested in WGTI as their personal piggy-bank to furnish lavish and luxurious lifestyle which include the purchase of multi-million dollar homes, a horse farm, cars, horses, and rare collectibles such as Steiff teddy bears." See Paragraph 2. And we're not talking chicken feed here. No, this is $667 million in investor funds, of which Greenwood and Walsh are accused of misappropriating $554 million—okay, well, sure, the SEC does allow that some of that money went to Greenwood's spouse (R. Greenwood) and to Walsh's ex-spouse (J. Walsh). You also have to give these guys some credit for bravado. As recently as February 5, 2009—in the midst of the Madoff case and the growing rumors about Stanford, and, well, add all those other lurid names as you see fit—the Defendants raised another $21 million from the University of Pittsburgh, an existing client.
On February 5, 2009, the National Futures Association (NFA) started an audit of Defendants and those good auditors were likely astonished to discover that the balance sheet showed only $95 million had been invested in the stock arbitrage strategy. Some $573 million was largely in notes payable to WGTI from Greenwood and Walsh—notes dating back to 1996! Apparently not getting the answers and assurance the NFA regulators sought, the organization suspended Greenwood's and Walsh's NFA membership. What had NFA uncovered? Nothing more complicated than an apparent effort by Greenwood and Walsh to take investors money from the business, use it for their own personal desires, and to cover the withdrawals through the issuance of personal promissory notes. That was the third prong of their strategy. First prong was the exposure. Second prong was the enhanced cash management. Third prong was take the suckers for all they are worth and issue promissory notes back to the firm.
If the allegations are proven true, it's no small wonder that the SEC has beaten a hasty retreat to the courthouse and is seeking an immediate temporary restraining order and asset freezes. Then there is also the sensible demand for disgorgement of the ill-gotten gains and for civil money penalties. Now it's not like WG Trading Company (WGTC) was some fly-by-night pennystock promoter. Certainly not—if that were the case I'm sure our regulatory community would have been all over such a little fraudster. No, in this case, WGTC is a New York Stock Exchange (NYSE) member firm. That always meant that you were just a cut above the riff raff. How times have changed.
Anyone Getting Mad And Not Wanting To Take It Anymore?
Here are some tough questions that I think the public needs to demand are answered:
How many times did the NFA, NYSE, NASD, FINRA, CFTC, and SEC examine the Defendants since 1996, and what were the findings?
Why are we only now learning about this and other multi-year frauds (many of a decade or more duration), and why did the regulators fail to detect them earlier?
Why did the promissory note scenario escape regulatory scrutiny for over a decade?
Who was personally in charge of NFA, NYSE, FINRA, CFTC, and SEC's regulatory program during the past 13 years (as it related to the Defendants) and what explanations do those individuals offer for the apparent failures to detect the serious fraud?
Bill Singer is a shareholder in the Securities Practice Group of law firm Stark & Stark. His private practice focuses on securities industry matters, with a concentration in the areas of: regulatory/compliance counsel, white-collar criminal, congressional hearings/investigations, membership listing issues, and litigation/arbitration. More of Singer’s musings can be found on his blog, http://www.brokeandbroker.com/.
| 2009-02-26 09:42
| 2007-12-14 23:59
| 2007-01-16 09:51
| 2007-01-16 09:40
I can not pass by this weekend without remembering last year.
It was May 20, 2004.
My apartment in Monaco (to be exact, in French side along the border bet Monaco and France) was definitely trembling with the explosive sound roaring.
"What's that sound?"
I woke up with a jerk and wasn't sure whether I was dreaming or not.
Apparently, it seemed to be real.
I made a desperate endeavor to speculate about the origin of that roaring sound.
After few minutes, a idea came to mind, which was enough to hit the nail on the head.
So, first qualifying round of Formula 1 Grand Prix had started.
The sound was exhaust coming from F1 cars.
I could not stop my tremor of delight.
F1 GP in Monaco...I've dreamed of watching it since I was in elementary school.
I headed straight for a ticket counter without hesitation.
My apt in Monaco.
Today, Formula One Grand Prix was held in Monaco.
Already one year passed since I was there.
Time flies fast!
Life is short!
Currently, I'm saying to myself that I have to cherish every moment and asking myself whether I'm improving myself everyday or not.
(to be continued....)
| 2005-05-22 13:44