03/28/2012

End of the Road for Himelsein Mandel Vehicle

Investors in a long-troubled life-settlement fund voted last week to liquidate the vehicle’s remaining assets and shut it down once and for all.

Limited partners representing a majority of the shares in Himelsein Mandel Offshore approved a plan to hire liquidation specialist Kinetic Partners to unwind the Cayman Islands vehicle and return investor capital. It was the latest twist in a financial-crisis saga that underscores the liquidity mismatch between life-settlement investments and the expectations of most hedge fund backers.

The fund operator, Himelsein Mandel Fund Management, launched the life-settlement vehicle and a U.S. companion, HM Ruby Fund, in 2006. By mid-2009, the vehicles had about $300 million invested in life-insurance policies.

The strategy began to stumble the following year, however, as the Los Angeles firm struggled to make premium payments to keep the policies current. Among other things, Himelsein Mandel secured a $65 million line of credit from Fortress Investment to fund the premium obligations until the funds started cashing in on “maturing” policies.

But the policies apparently didn’t pay out soon enough. In November 2011, the firm reached an agreement to sell its entire life-settlement portfolio to an unnamed investor, with the understanding that as the policies matured, the investor would split the proceeds with the funds’ limited partners. The funds now hold participation notes in those policies, which have a combined face value of $700 million to $1 billion.

Investors in the offshore fund soon ran out of patience, however. According to a March 1 investor letter, a group of limited partners recently moved to petition a Cayman Islands court to force the manager to unwind the fund pursuant to Cayman law. That prompted last week’s proxy vote, in which investors were asked to voluntarily liquidate the vehicle. Kinetic has assigned Mark Longbottom and Geoff Varga to handle the liquidation.

The participation notes held by Himelsein Mandel Offshore could fetch up to $100 million in a secondary-market auction, one source estimated. Even at that valuation, most of the fund’s investors would suffer substantial losses on their initial investments.

As of February 2010, Himelsein Mandel Offshore had produced an average annual return of 17.3% — mostly in the form of unrealized gains. At the time, the fund reported having $211 million under management.

The status of the HM Ruby vehicle is unclear, but market players said they expect those investors also will be given an option to liquidate their assets and shutter the fund.

When they launched the vehicles, firm founders Wayne Himelsein and Jason Mandel told investors they were targeting annual returns of 18-22%. One market player said the firm may have been too aggressive in snapping up life-insurance policies before the financial crisis, then suffered for it when investor capital dried up.

“You needed constant cashflow in order to make the premium payments,” he said. “And if you couldn’t get people to invest in your funds, you had no more of that cashflow.”

It’s unclear what remains of Himelsein and Mandel’s firm. They’re now suing Fortress for seizing $1.4 billion of life-insurance policies that had collateralized the $65 million credit line.

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