Locked hedge fund investors face four-year wait, says Tullett Prebon

Some investors locked into hedge funds in the financial crisis may not have redemptions satisfied fully until 2015, according to market intermediary Tullett Prebon, in a sign the liquidity crunch that hit almost three years ago has further to run.

Neil Campbell, Tullett Prebon’s head of alternative investments (pictured), said redeeming investors in strategies including direct lending and illiquid credit may not be paid out in full until 2015.

“At the height of the crisis most pain was felt in these strategies. Although these managers can make distributions – maybe 10% to 15% each redemption date – it’s still going to take investors two to four years to get all their money back.

“All the funds that could become liquid sooner have already become liquid, and what we’re working through now is illiquid positions that will last for a long time.”

By Tullett Prebon’s estimates, about $60bn remains locked. Illiquid positions give managers headaches – “a nightmare to administer which eventually you have to clean up” – and irritate investors immensely.

The firm offers ad hoc matching of sellers with willing buyers of troubled fund stakes, with transactions occurring at typical discounts to NAV of between 25% and 35%. It has sold stakes for as little as $60,000, and for over $100m.

Sellers have included North American and European pensions.

The broker is launching an auction service, working closely with fund GP’s, disseminating asking prices for stakes and lowering them until a buyer is found.

“For investors bidding on entire portfolios, it is a useful service because it has already been a long time horizon waiting for liquidity, as side pockets will normally require a two- to four-year view. To offer people a solution at this stage of the cycle is helpful to all counterparties,” Campbell says.

Tullett Prebon will charge the buyers, not sellers, of stakes, in contrast to some rivals. “If you charge the sellers they effectively pay twice – once in having to sell at a discount [to NAV], then again to transact.”

It then aims to keep quoting prices on the stakes “to create liquidity in the market, not just conduct auctions then move on.” It quotes on between 150 and 200 stakes presently.

Some of these are stakes in funds entangled in cases of fraud.

These include asset-based lending funds that invested in convicted embezzler Tom Petters in the US – stakes cost $0.05 per dollar of face value – and funds offloading their rights to recompense from Bernard Madoff’s fraud.

These fetch anywhere between $0.20 and $0.60 in the dollar – up from near nothing following Madoff’s arrest.

Campbell concedes: “That is a market that took a long time to develop, but as people are being claimed against, and as the trustee [Irving Picard] gets more money back, people see these stakes are worth something. A lot has traded already and a there is a lot more to trade yet.”

Not all investors selling stakes are hamstrung by fraud or illiquidity. Some may simply seek exit more quickly than standard redemption terms allow, or to avoid exit fees.

Willing buyers include funds of funds, family offices and asset managers with specialist portfolios vacuuming up illiquid stakes.

David Walker

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