Thu, 20/09/2007 - 07:52
Shares in London-listed hedge fund manager Absolute Capital Management have fallen by nearly 90 per cent in three days following the departure of the firm's co-founder and co-chief investment officer, Florian Homm.
The company's board also announced that seven of the eight equity funds Run by Absolute Capital contained illiquid investments that could probably not be realised at their current valuation, and with redemption requests exceeding USD100m in the wake of Homm's departure, it was suspending net asset value calculation and redemptions for the funds affected.
Shares in Absolute Capital, which has USD3.2bn in assets under management and was listed on London's Alternative Investment Market early last year, plunged by nearly 70 per cent from 390p to 118.5p on Tuesday, by a further 47 per cent to 62.5p the following day, and by 22.4 per cent to 48.5p on Thursday.
The company's share price peaked at 580p in July, just before the departure of co-founder, chairman and chief executive Sean Ewing as well as the outbreak of market turbulence that led to most hedge funds losing money in August. The company's market capitalisation at the close of trading on Thursday was just GBP34m.
Homm, who attracted headlines after being shot during an attempted robbery in Venezuela last year, dramatically announced his resignation in an open letter to investors from his base in Palma de Mallorca in which he said he had ploughed some of his own shareholding in the firm into funds he managed in order to keep their performance in positive territory.
He wrote: 'In the recent market, I have become concerned with the performance of certain of our funds. My dedication to ACMH's investors is such that I donated five million shares of ACMH, worth approximately EUR33m, to the funds last month.
'This move was consistent with other firms in the industry which have contributed their own capital in order to help investors ride out the instability in the markets. As a result of my actions, those funds have ended up positive or neutral for the month.'
Homm said there had been a disagreement with the board over remuneration of the firm's investment professionals, claiming he had donated his own annual bonus this year to share it with his colleagues, but that other directors had failed to follow his example.
'The board of ACMH did not agree that ACMH needs to pay adequate compensation to retain top-level fund managers, nor did they follow my lead in sacrificing personal bonuses and compensation, or in contributing ACMH shares to the funds.'
Homm said that his investment and management philosophy differed from that of 'the current and prior management' and was therefore resigning as of Wednesday, but added that he did not plan to start another fund or compete with Absolute Capital, of which he remains the largest single shareholder.
In a statement issued on Wednesday morning, the board suggested that the liquidity problems were in funds managed personally by Homm or over which his investment philosophy held sway. Absolute Capital's fixed income and real estate portfolios, which are managed independently and have around USD1bn and USD130m respectively under management, are not affected.
'The board of ACMH has begun a review of the equity fund business and in particular the portfolios of the investment funds previously under Florian Homm's immediate control,' the statement said.
'The preliminary results of this review indicate that seven of the eight Absolute Capital equity funds contain quoted investments which the board believes are not immediately realisable at their stated values due to their illiquid nature.
'All such equity investments are carried at market price as reported through the US-based Over the Counter Bulletin Board/Pink Sheets and have been marked to market in accordance with industry practice. However, as liquidity adjustments are not contained in the funds' valuation methodologies, current net asset values do not reflect the immediately realisable value of such investments.
'Subsequent to Florian Homm's resignation, the company has received in excess of USD100m million in redemption notices, which, combined with the illiquid positions, will force the suspension of the calculation of the funds' net asset values and investors' ability to redeem fund shares in the normal course.'
The board estimates that between USD440m and USD530m of the equity funds' assets are affected in by illiquidity, mostly in funds previously managed directly by Homm but to a lesser degree in other equity funds 'as a result of Florian Homm's ability to effect trades on all of the company's equity funds'.
The illiquid positions identified by the board are in seven out of eight equity funds totalling USD2.1bn in assets and range from between 1 and 5 per cent of the USD18m Absolute India Fund to 35-40 per cent of the USD490m Absolute Return Europe fund and 40-45 per cent of the USD342m Absolute Octane fund.
The board has proposed placing the illiquid investments in side-pocket structures that would allow the funds' liquid asset to trade normally, but with a 12-month lock-in period for all investors in the equity funs in order to achieve an orderly resolution of the problem.
'The illiquid positions would be transferred into separate portfolios to which newly-issued side pocket shares will relate,' the board said. 'Following the restructuring, fund investors will hold two classes of shares in each of the funds, the first tracking the funds' liquid portfolio and the other the illiquid portfolio.
'The funds' liquid portfolios would continue to be traded in the normal course using current NAV calculation methodology, whilst the illiquid portfolio would be re-priced following extensive due diligence with the assistance of independent outside advisors. The funds' illiquid portfolios would be managed with a view to orderly realisation.'
'As part of this proposed restructuring, the equity funds would seek a 12-month lock-in from all investors. The effect of this action will be to close the affected funds to redemptions for the period, thereby ensuring that all investors in the funds are treated equally. The management fee will remain in place and some adjustment to the performance fee structure will be proposed.
'The company believes that the proposed restructuring of the equity funds and the imposition of the lock in period will provide stability to its equity fund business and additional flexibility to create value for all stakeholders.'
The board also rejected Homm's version of events regarding the bonuses paid to investment professionals. 'The company has received notification from the vendors of the Argo Group (acquired in February 2007), that as a result of the above events, they consider that the company has breached certain representations and warranties given pursuant to the purchase agreements,' the statement said.
'Under those agreements, the Argo vendors reserved the right to veto increases above 20 per cent to the company's employee bonus pool. Florian Homm's resignation letter alludes to disagreement with the Board over the size of the company's bonus pool.
'The arrangement that resulted in these veto rights for the Argo vendors was borne of the insistence by Florian Homm and others that the company's bonus pool should remain at 20 per cent, which resulted in the company's then shareholders retaining a bigger part of the enlarged group.
'It is disingenuous that Mr. Homm has sought to portray himself as the employees' champion. For the avoidance of doubt, the company's remuneration committee approved the payment of bonuses in the amounts recommended by Florian Homm. The Argo vendors and the company have undertaken to negotiate in good faith the resolution of the above issues.'
The board says it plans to appoint senior investment professionals to manage the Absolute Octane Master Fund, the Absolute Activist Master Fund and the Absolute European Catalyst Fund, as well as appointing a new co-chief investment officer in due course.
'At this stage the board is focused on exploring all options which will assist in maximising value for investors in both the funds and in ACMH,' says chief executive Jonathan Treacher. 'It is also focused on ensuring that recent events do not overshadow the fact that the majority of the business is unaffected and our investment professionals will continue to trade as normal.'
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