07/31/2013

Stone Lion Fund Targets Bankruptcy Plays

Stone Lion Capital has wrapped up marketing efforts for a distressed-asset vehicle.

The New York firm held a single close for its SL Liquidation Fund on June 3 with $445 million — continuing a growth streak that started with the creation of at least one separate account sharing the vehicle’s strategy some months ago.

Indeed, Stone Lion’s net assets now stand at $1.4 billion, up from $810 million at yearend 2012. In a second-quarter letter to investors dated July 19, the shop attributed the size of the new fund to strong interest from both new and existing backers — including foundations and pension systems.

SL Liquidation and the accompanying separate-account business seek discounted credit plays involving companies or government entities that are bankrupt or involved in legal disputes, including purchases of bonds and creditor claims. The aim is to produce annual returns in the mid-teens with low correlation to other markets.

The strategy is similar to a component of the firm’s flagship Stone Lion Portfolio that generated annual net gains of 24% from November 2008 until this March. Those holdings included investments tied to a who’s who of blowups, including Bernard L. Madoff Securities, CapMark Financial, Fontainebleau Resort Las Vegas, General Motors, Idearc, Lehman Brothers, Lyondell Chemical, MF Global, Smurfit-Stone Container, Swissair, Vitruvian Investments and Washington Mutual — along with a collection of Icelandic banks.

The new fund aims to fortify its returns by focusing on smaller, hard-to-find deals. It will hold 10-20 positions at a time, each intended to produce cash distributions.

In a first for a commingled pool from Stone Lion, the vehicle employs a drawdown structure similar to that of a private equity fund. The plan is to invest and reinvest capital for a year, after which point the firm would distribute income to investors for two years. It then would have the option for a one-year extension, but with only a third of the capital held at the end of the initial two-year distribution period.

Investors are paying fees equal to 1.25% of deployed capital and 17.5% of profits.

The fund is managed by Gregory Hanley and Alan Mintz, who formed Stone Lion as a spinoff of Tudor Investment in 2010. They had arrived at Paul Tudor Jones’ firm two years earlier from Bear Stearns.

The duo’s business is now about evenly split between the SL Liquidation strategy and the $624 million Stone Lion Portfolio. The offshore version of that fund was up 8.7% during the first half of this year, following gains of 11.3% in 2012, a flat performance in 2011, and profits of 9.25% in 2010 and 63.7% in 2009. It pursues a range of credit-related plays, employing event-driven, distressed-asset and special-situations strategies.

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