06/24/2009

Farallon Pays Investors Ahead of Schedule

Farallon Capital has managed to unwind a so-called liquidating trust faster and more profitably than many investors had expected.

The $22.7 billion firm angered redeeming investors at the end of last year with a plan to lock up their assets in a separate vehicle until market conditions improved. Investors feared the liquidating trust could take many months to unwind.

But a faster-than-expected turnaround in financial markets allowed the firm to pay redeeming shareholders 85% of their investments in the liquidating trust as of June 1. By the end of this month, redeeming investors are expected to have received almost 90% of their money.

Investors were further surprised to learn that the assets in the liquidating trust have posted 13%-plus gains. The results are a vindication of sorts for Farallon founder Thomas Steyer, whose plan to manage the assets initially drew investors' ire.

Like many other hedge fund operators, Steyer's San Francisco firm restricted withdrawals after investors queued up to redeem at the end of 2008. Investors in Farallon's Capital Partners fund asked to withdraw 25% of the assets after the fund lost about 28% through aggressive investments in stocks and bonds, as well as private equity plays.

In setting up the liquidating trust, the firm told shareholders it wanted to avoid dumping assets at fire-sale prices - a standard refrain among hedge fund managers during the most difficult year in the industry's history. Across the industry, fund managers set up special-purpose vehicles to sell the assets of redeeming investors over time.

In many cases, investors seeking to withdraw from hedge funds were dismayed to discover a large proportion of illiquid assets - even in funds that claimed to follow a liquid strategy. That wasn't a problem for Farallon, which has a long-standing policy of holding illiquid assets, including private equity investments, in side pockets. When the firm set up the liquidating trust for redeeming investors, the illiquid holdings remained in the side pockets.

Steyer further defused investor concerns by refraining from charging management or performance fees on the assets in the liquidating trust.

Improvements in the equities and credit markets have allowed other fund managers to loosen liquidity after restricting or suspending withdrawals late last year. Los Angeles-based Canyon Capital, for example, had moved the least liquid assets in its Canyon Value Realization Fund into a so-called designated investment pool. At the start of the year, the vehicle held about 40% of the fund's assets. In recent weeks, however, the firm has been able to sell many of those holdings, shrinking the designated investment pool to about 20% of the fund's assets.

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