03/24/2010

First Signs of Spring for Asset-Based Lending

Investors in asset-based-lending hedge funds, whose positions have been virtually frozen since the credit crisis, are starting to see signs of a thaw.

Because asset-based lending is an inherently illiquid strategy, fund managers across the board suspended redemptions and restructured their vehicles in late 2008 and early 2009. Until recently, most managers have been unable or unwilling to liquidate their funds' assets, leaving their investors in limbo. Amid the ongoing liquidity concerns, investors couldn't even sell their shares on the secondary market.

In just the past few weeks, however, secondary-market players have seen a slight uptick in activity involving shares of several asset-based-lending vehicles, including funds operated by Himelsein Mandel Fund Management, Third Eye Capital and Medley Global. A few transactions have closed, though in most cases the bid-ask spreads remain wide. Still, a market is beginning to form where none existed for more than a year.

"We're seeing these positions start to transact," said Neil Campbell, head of alternative investments at London brokerage Tullett Prebon. "Liquidity seems to be returning."

In most cases, asset-based-lending managers have yet to pay back their investors. That's because some of the companies that they lent to went belly up during the financial crisis or otherwise have been unable to repay their debts. In other cases, the funds made loans to fraudulent schemes, such as those run by Tom Petters in Minnesota and Scott Rothstein in Florida.

Until recently, the funds were loath to write down their investments, hoping instead that the loan market would eventually improve to the point where their losses would be negligible. But in the face of mounting pressure from investors, some managers are now capitulating, agreeing to liquidate their assets for whatever they can get.

This, in turn, has sparked the interest of secondary-market players looking to pick up hedge fund shares at deep discounts. Among the interested parties are private equity firms, vulture funds and distressed-asset specialists.

"The main driver now is the appetite of a handful of buyers," said a fund-of-funds manager who invests in asset-based-lending vehicles. "Some would like to buy these things at a discount and wait it out."

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