With a reported $100 billion of notional value of the total $1.5
trillion invested in private equity funds being categorized as
“illiquid,” and potentially similar levels still tied up in
gated/suspended hedge funds and side-pockets, investors are now
considering options to recover their invested capital from these
“zombie” funds.
Adding insult to injury, is that while these investors continue to wait
for redemptions from these zombie funds, which generally trace their
claims of illiquidity to the 2008 collapse, they continue to be charged
fees, despite claims by the incumbent manager’s of its to sell assets at
or close to the values being reported – raising questions by some as to
whether these values are truly at market, or are simply being pegged at
unrealistically high levels to generate on-going fees.
In opposition to this practice, and driven by their own liquidity needs,
investors are becoming proactive, engaging financial and legal advisors
to review valuations, or garner control of the funds through the
outright replacement of the manager, or the appointment of a liquidator
or receiver. Actions like these are also becoming more prevalent given
the derisory bids for partnership interests in the secondary market.
Specifically, replacement managers are being sought to take proactive
steps in assessing value and monetizing assets. While these replacement
manager roles are technically different from the appointment of a
liquidator, the general premise and mandate is the same, resulting in
certain advisory firms expanding their practices to actively pursue and
take on these roles.
“If investors have concerns over the valuation of the underlying assets
and/or the manager’s efforts to effectively monetize them, then they
should take steps to independently ascertain what the portfolio is
worth, or alternatively seek to bring in new management to proactively
wind-down the portfolio in an expeditious yet effective manner,” said
Geoff Varga, global head of Kinetic Partners’ Corporate Recovery and
Restructuring Practice. Kinetic Partners, who routinely act as
liquidator to many troubled funds, has also recently been brought in as
the replacement fund manager to the Louisiana-based Commonwealth and
Sand Spring funds which filed for Chapter 11 in late 2011. Varga added,
“Generally speaking, our mandate is clear – review and assess the
situation and return value back to stakeholders in a prudent and
efficient manner. We are not looking to raise new monies or make new
investments, so in that way not a typical asset manager and therefore
bring a different perspective/incentive to the table. We also attempt to
interact as much as possible with investors to gauge their expectations
and timing requirements with respect to recoveries. Getting a better
understanding of the overall value involved and the time needed to
monetize that value is of real significance to investors, particularly
those parties that are themselves investing other people’s money in a
fiduciary capacity.”
Regardless of the route taken to cede control of these zombie funds, the
presence of “new management” can generally eliminate the external stigma
and frustration of former management, even though “new management” may
make use of the former management’s knowledge and skills. And while the
replacement process will come with a cost, in most instances, there can
usually be an overall reduction of the ongoing fees that were
potentially being unduly charged, replaced with a new fee structure that
is better aligned with investors’ interests. Additional cost savings can
also usually be achieved through various administrative reductions.
About Kinetic Partners (www.kinetic-partners.com):
Kinetic Partners is an award winning global professional services firm
providing regulatory consulting & compliance, corporate recovery &
forensic services, remedial, risk consulting & monitoring, tax and audit
& assurance services to the asset management, investment banking and
broking industries. Launched in 2005, Kinetic Partners has grown
rapidly, and has a team of 140 across its eight offices in London,
Dublin, Cayman, New York, Geneva, Hong Kong, Luxembourg and the Channel
Islands. Kinetic Partners services over 1,300 clients and has attained a
reputation as the leading provider of professional services in its
chosen market sectors.
2012 highly commended for “Best regulation and compliance advisor” at
the HFM European Performance Awards
2011 winner of
Hedgeweek's "Best regulatory advisory firm" in the US
2010
winner of Funds Europe's "European advisory firm of the year"
2009
and 2010 winner of HFM Week's "Best regulatory advisory firm" in Europe
and US
2008 winner of Fund Domiciles "Best consulting firm"
in Ireland and Cayman
