01/14/2009

Plainfield Hosts Auction for Fund Stakes

After suspending redemptions two months ago, Plainfield Asset Management turned around and set up an auction to let investors in its $5 billion flagship fund sell their stakes on the secondary market.

Though some fund operators have condoned secondary-market sales in the past, Plainfield's move may be the first time a fund shop has coordinated the effort itself. The rationale: An auction allows disgruntled investors to cash out without forcing the fund operator to sell off assets in depressed markets.

The Greenwich, Conn., firm arranged the auction for investors in the Plainfield Special Situations Master Fund, a multi-strategy credit fund that was down 9% last year through October. By the end of October, investors sought to withdraw a whopping 30% of the fund's assets at yearend, prompting Plainfield to suspend redemptions in November.

After that, the fund shop tapped Credit Suisse to organize a "modified Dutch auction," according to a letter to investors. Investors interested in selling their stakes and potential buyers were invited to submit offers by early January. Credit Suisse would then set a clearing price that would allow for the maximum number of completed deals. Fund investors who were willing to sell at or below the clearing price would be matched with buyers whose bids were at or above that price.

To attract bidders, Plainfield agreed to allow buyers of fund stakes to assume the fund's high-water mark, meaning they won't be subject to performance fees until the fund's assets return to their peak level. Buyers also will be transferred into lower-fee share classes Plainfield set up on Jan. 1. Current investors also have been given the chance to move their investments to the new share classes.

Auction bids originally were due on Dec. 22, but Plainfield extended the deadline because of the holidays. Investors and bidders were to base their offers on the fund's net asset value at the end of November. The final clearing price will be determined by a formula based on the fund's NAV as of Dec. 31. The auction process is expected to wrap up in early February.

As hedge funds across the board have posted double-digit losses, the secondary market for hedge fund stakes has picked up. "Volume has increased exponentially over the last several years, and especially in 2008," said Jared Herman, an agent for the secondary-market exchange Hedgebay.

For years, some fund managers have worked with Hedgebay, based in the Bahamas, to facilitate secondary-market sales. But many managers have been hostile to the idea of stakes in their funds being sold on the open market.

Before organizing the auction, Plainfield set up a special-purpose vehicle to hold assets of investors seeking to redeem their shares. Those investors will see their shares redeemed only when the fund is able to sell the assets, which Plainfield chief Max Holmes expects could take up to three years.

The fund operator also runs Plainfield Direct, a fund that invests primarily by writing loans for mid-size private companies.

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