10/27/2010

Stark Hires Bank to Auction Investors' Stakes

Stark Investments is the latest hedge fund manager to hire Credit Suisse to help gated investors sell their shares on the secondary market.

Credit Suisse will soon conduct an auction for shares in a special-purpose vehicle dubbed Stark Select, which holds $1 billion of illiquid assets that Stark has been struggling to sell since the market debacle of 2008. As outlined by Stark executives on an Oct. 22 conference call, the investment bank will first solicit bids from outside investors, then survey Stark's limited partners to see what price they'd be willing to accept for their shares. Credit Suisse will then set a "clearing price" aimed at generating the highest volume of trades.

The bank has conducted similar auctions for at least eight other fund operators, including Camulos Capital, GoldenTree Asset Management, Ospraie Management, Plainfield Asset Management and RAB Capital. The auctions have met with mixed success. Cumulatively, they have facilitated the sale of $800 million of hedge fund stakes, but market players say that represents a small percentage of the total shares held by gated investors.

Like many hedge fund managers, Stark was unable to meet the mountain of redemption requests that piled up during the financial crisis. In late 2008, the St. Francis, Wis., firm suspended withdrawals from its flagship Stark Investments fund and an offshore companion, Shepherd Fund, and set about restructuring the vehicles. The centerpiece of the restructuring effort was creating the Stark Select vehicle to hold billions of dollars of illiquid assets, including real estate, reinsurance and a big chunk of Asia credit investments.

Over the past two years, Stark has managed to liquidate about 75% of the assets in the special-purpose vehicle, handing over the proceeds to investors. In the Oct. 22 conference call, the firm said it was on track to liquidate 15% of the remaining assets - or about $150 million - by yearend. It laid out a timetable for selling all of the remaining assets by 2013, returning the proceeds to investors every quarter until the vehicle is depleted.

The Credit Suisse auction is designed to appease investors who no longer have the patience - or the pocketbooks - to wait until the liquidation process is complete. Outside investors have until Nov. 23 to submit bids for Stark Select shares. Stark shareholders will be asked to reveal what's acceptable to them between Nov. 30 and Dec. 7. Credit Suisse then will announce a final clearing price on Dec. 17.

Past auctions have seen shares trade in a range of 73-80 cents on the dollar. Despite being locked up for nearly two years, however, many hedge fund investors remain unwilling to let go of their shares at steep discounts. As a result, the bid-ask spreads remain wide, according to market players who follow the secondary market. Another factor keeping a lid on volume: Buyers must conduct extensive due diligence, including valuing the underlying assets, before they can formulate bids.

Founded by Brian Stark and Mike Roth in 1992, Stark had some $13 billion under management before the financial crisis. Since then, assets have shrunk to $4.4 billion as of July 31.

Stark has seen an exodus of high-level executives this year, including the departure of five of the firm's 12 partners (see article on Page 7). Brian Stark has told investors he remains committed to rebuilding the firm.

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