05/19/2010

Medley Maps IPO Strategy to Free Investors

Medley Capital is pitching an unusual plan to restructure its asset-based lending hedge fund, which has had a freeze on withdrawals since late 2008.

In a May 4 letter to its investors, the $1 billion New York firm proposed transferring a portion of the assets in Medley Opportunity Fund to a "business development company" that would be structured as a publicly traded corporation. The new entity would manage the assets - eight loans with a combined principal balance of $112 million - until market conditions improve to the point that they can be sold at or near par value. Meanwhile, Medley's investors would be given shares in the new company in exchange for their shares in the hedge fund.

While details of the plan remain sketchy, Medley appears to be taking a cue from Warren Lichtenstein's Steel Partners, a New York firm that last year converted one of its hedge funds into a publicly traded company. The move drew a lawsuit from a big investor, Carl Icahn's AFC Industries, which accused Steel Partners of fraud.

Medley proposes to capitalize the business development company via an initial public offering on the New York Stock Exchange. Separately, Medley would allow limited partners in the asset-based lending vehicle to exchange some of their hedge fund shares for common stock in the new company. Those investors would be permitted to sell the stock on the open market following a six-month moratorium.

Medley's current investment team would continue to manage the assets transferred to the business development company. "We believe that keeping this team in place is valuable to the continued successful performance of MOF," portfolio manager Brook Taube said in the letter. In addition to managing the outstanding loans, the planned company could make new investments via loans to middle-market companies in North America.

Medley believes its hedge fund investors have a good chance of realizing a gain on the assets to be transferred to the business development company. "For the first time in nearly two years, we are cautiously optimistic that the broader economic recovery may begin to help accelerate the resolution of individual assets," the letter said.

Medley Opportunity Fund was one of the few asset-based-lending hedge funds that remained profitable even as credit markets tanked in 2008. Nonetheless, Medley suspended redemptions as investors tried to pull their money out en masse in late 2008. The firm has said it may take years to liquidate the fund's holdings and return investor capital.

Medley decided to explore the novel restructuring plan after it tried unsuccessfully to broker sales of investors' shares on the secondary market. One buyer apparently was willing to pay 65 cents on the dollar for shares in Medley Opportunity Fund, but according to Medley, not enough investors were willing to sell at that price. The firm has signaled that it remains open to negotiating secondary-market transactions. In the meantime, investors are free to pursue their own trades.

Some investors said they are losing patience. "While Medley gets a passing grade for attempting different ways of garnering liquidity, it gets a failing mark for both failing to explain why its proposed secondary sale at 65 cents on the dollar didn't work out or how this new transaction would work," one investor said.

Medley, founded by former Soros Fund Management partner Richard Medley, makes loans to small- and mid-size companies. Brook Taube and his brother, Seth Taube, along with Andrew Fentress, established Medley Opportunity Fund in 2006. The three previously managed Columbus Nova Partners, a hedge fund they shuttered in late 2005.

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