09/11/2013

Garrison LPs Await Payouts Via Share Sales

A business development company formed by Garrison Investment to help unwind its illiquid hedge funds should soon begin paying off for the funds’ limited partners.

The company, Garrison Capital, raised $85 million via an initial public offering on March 26. The proceeds of the share sale were used to fund loans to middle-market companies — part of an effort to increase the value of its business.

In the coming months, however, Garrison Capital will commence a series of secondary share sales whose proceeds will be used to help cash out investors in Garrison Special Opportunities Fund and an offshore companion, Garrison Credit Opportunities Fund. At the end of the first half, the two vehicles had a combined $311 million under management.

The New York fund manager aims to complete the liquidation process by September 2015. Although investors have been stuck since 2009, the funds haven’t lost money. Indeed, they’ve generated a cumulative return of about 50% since their inception in February 2008. They were up 7.1% during the first half of this year.

Garrison, which launched in 2007 with backing from Fortress Investment, invests in corporate and real estate debt, often focusing on distressed situations. The strategy turned out to be ill-suited for a hedge fund format, even though the liquidity terms of the Garrison vehicles are somewhere between those of a typical hedge fund and a private equity fund. Since the financial crisis, Garrison has focused on raising capital via private equity vehicles. The firm currently manages about $3.2 billion.

The business development company was set up in 2010 to absorb some of the assets of the hedge funds and provide a partial exit strategy for limited partners. The funds seeded Garrison Capital with a $300 million collateralized loan obligation dubbed Garrison Funding. The funds initially owned 100% of Garrison Capital — a stake that shrank to about a third following the initial public offering. Subsequent share sales will further reduce the funds’ stake in the business development company, as ownership is transferred from limited partners to common stockholders.

Garrison Capital must wait six months from its IPO to initiate a follow-up share offering — or at least until Sept. 22. It’s likely the company will wait until its market cap, currently about $248 million, rises measurably above its book value, which was $252 million as of June 30. Shares, which initially priced at $15, were trading at $14.80 on Sept. 10.

Aside from the stake in Garrison Capital, the funds’ holdings include three real estate positions that account for about 21% of overall assets, as well as investments in CLOs.

Garrison was founded in 2007 by former Fortress executives Joseph Tansey and Steve Stuart.

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