06/17/2009

Pursuit Partners Sells Assets at Big Discount

Pursuit Partners liquidated asset-backed securities at a deep discount to their late-March values instead of complying with some redeeming investors who believed they could have recovered more by taking possession of the bonds.

At the end of March, the Stamford, Conn., firm set up a special-purpose vehicle for investors seeking to redeem from Pursuit Capital Management Fund 1 and an offshore companion vehicle. A number of investors asked for in-kind payments of the securities, but Pursuit turned most of them down, saying that dividing the holdings into smaller pieces would make them even harder to sell. The firm said it would consider in-kind distributions only for shareholders with more than $50 million of assets - a threshold that excluded all but two investors.

Then, in mid-May, Pursuit sold a third of the asset-backed securities in the special-purpose vehicle for 20% of their value as reported in the most recent audited statement on March 31.

Around the time of the sale last month, Pursuit offered to buy some of the asset-backed securities directly from investors. But the prices the firm offered were much lower than the valuations contained in the March 31 report.

The fund, which managed about $400 million earlier this year, invests in structured-credit products, including residential mortgage-backed securities, collateralized debt obligations and collateralized loan obligations.

In January, Pursuit offered investors two options: either redeem their investments or remain in the fund and accept an 18-month lockup. Exiting investors would receive 40-50% of their redemption requests in cash plus shares in the special-purpose vehicle. At the time, Pursuit told shareholders it would no longer hedge risks associated with the special-purpose vehicle. The firm also said that it would no longer provide audited financial statements for those assets beyond a final report on March 31. In the end, investors representing 80-90% of the fund's assets asked to redeem.

Pursuit initially warned investors that the assets in the special-purpose vehicle wouldn't necessarily sell at the prices they were marked at in the March 31 report. It also said that it might buy assets from the vehicle for the firm's own accounts.

The firm agreed to forgo management and performance fees for assets in the special-purpose vehicle, but told investors that associated costs would be billed to the vehicle.

Pursuit is run by Frank Canelas and Anthony Schepis. In addition to its hedge fund business, the firm operates a broker-dealer that trades asset-backed securities.

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