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January 11, 2017  

Fir Tree Taps Texas Teachers for New Fund

Fir Tree Partners, whose strategy combines elements of hedge fund and private equity investing, is marketing a new vehicle that locks up investor capital for three years.

That’s longer than usual for the $9.6 billion distressed-debt shop, whose previous offerings typically impose two-year lockups. The new entity, Fir Tree Capital Opportunity Fund 3, targets “medium-term assets — those caught between shorter hedge fund capital and private equity capital,” the firm wrote to investors last month.

“We believe the opportunity set for medium-term assets . . . will continue to improve due to fewer natural buyers, complexity and barriers to entry,” the letter said. “We further believe that our ability to hold and govern these assets through various avenues (e.g. bankruptcy, restructuring, liquidation, etc.) enables us to maximize recoveries and provides a competitive advantage to peers.”

The New York firm describes Fund 3 as a “strategic partnership” with Texas Teachers, a $133 billion pension system that is a long-time backer of Fir Tree funds. The letter didn’t disclose the amount the pension is investing in the new vehicle.

“Over the years, we have collaborated with [Texas Teachers] on unique fund structures to create competitive advantages, including a dislocation program aimed at investing during turbulent periods,” the letter said. With its longer-term lockup, Fund 3 “provides a strong alignment of interests and recognizes the power of patient capital.”

Texas Teachers, whose hedge fund portfolio totals about $11 billion, recently put the fund managers it works with on notice that it wants to negotiate new fee terms, Pensions & Investments reported last month. Specifically, the pension is proposing a 1-and-30 fee structure under which it would pay a 1% management fee and a 30% performance fee, which could be subject to a hurdle equal to the management-fee expense. Texas Teachers developed the new fee structure with consultant Albourne.

The Fir Tree Capital Opportunity Fund series has $1.8 billion of gross assets. The capital-raising effort for Fund 3 is led by Ben Ghriskey, who oversees marketing and investor relations.

The firm manages the bulk of its assets in the Fir Tree Value Fund series. Both the Capital Opportunity Fund series and Value Fund series are structured as open-end vehicles that restrict limited partners from withdrawing their money for two years.

A growing number of fund managers that traditionally invested only in liquid securities have felt compelled to consider longer-term positions and fund structures in an effort to boost returns amid historically low interest rates and lackluster performance. But Fir Tree, led by Jeffrey Tannenbaum, has specialized in less-liquid investments and hybrid fund structures since its founding in 1994. Tannenbaum is an alumnus of private equity pioneer KKR.

“Twenty years ago, the proposition of a long lockup that we presented to our investors was new and went against the establishment,” the firm said in introducing its latest offering. “We thought it was the right business model for investors, so we pushed forward. After two decades, we believe the power of the Fir Tree model is well proven and the advantages of locked-up capital are widely accepted today.”