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Absolute Capital fund restructuring wins investor backing

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Absolute Capital Management has won mostly comfortable majorities in support of its restructuring plans for four funds whose exposure to illiquid, hard to trade US micro-cap stocks was rev

Absolute Capital Management has won mostly comfortable majorities in support of its restructuring plans for four funds whose exposure to illiquid, hard to trade US micro-cap stocks was revealed following the dramatic resignation in September of co-founder and co-chief investment officer Florian Homm.

Extraordinary general meetings of the Absolute European Catalyst Fund, Absolute Octane Fund, Absolute Return Europe Fund and Absolute East West Fund were held last Saturday in Grand Cayman, where the funds are domiciled, to vote on resolutions approving the proposed restructuring plans for the funds set out in circulars sent to shareholders on September 27.

The restructuring proposals include segregation of the illiquid assets in side-pocket structures, 12-month lock-ups for both the funds and side-pockets with limited liquidity for the liquid class, changes in the NAV calculation method to provide for re-pricing of the illiquid assets using external valuation opinions, and a reset of the funds’ high water marks at the higher level of the restructuring date and the two following months.

Implementation of the proposals required a positive vote of shareholders holding not less than 75 per cent of each fund’s shares represented at its extraordinary general meeting.

According to Absolute Capital, the resolutions to approve the restructuring were passed at the meetings, comfortable in the cases of the Absolute East West Fund, 95 per cent of whose shares were voted in favour, the Absolute Return Europe Fund (87 per cent) and Absolute European Catalyst Fund (86 per cent). The vote to approve the restructuring of the Absolute Octane Fund achieved the required level of support by the barest of margins (76 per cent).

The firm has announced it has also received the consent of limited partners holding 76 per cent and 91 per cent respectively of limited partnership interests in the Absolute East West Fund LP and Absolute Octane Fund LP. Consent of two-thirds of the limited partners was required to implement the limited partnership funds’ restructuring proposals.

‘We are very pleased that our investors have chosen to restructure our funds to allow for the orderly management and realisation of their illiquid assets,’ says Absolute Capital’s general counsel Glenn Kennedy. ‘We are confident that our plan will result in result in higher realisations not only from these particular assets, but also from the funds’ liquid portfolios when compared with a liquidation conducted by a third party.

‘This, ultimately, is in the best interests of all stakeholders. I would expect that increasingly we’ll see hedge funds facing redemption shocks proposing to restructure in a similar way. In such circumstances, restructuring to allow for the orderly management of a fund’s portfolio by its existing manager is inherently a more sensible approach than turning over what are often very complex pools of capital to outside liquidators.’

Peter Cockhill, a partner at the firm’s legal counsel in the Cayman Islands, Ogier, adds: ‘These funds faced a crisis which many commentators thought would result in their liquidation. It was essential that the restructuring plan was robust, detailed and fair. By meeting these criteria the plan gave the directors and investors the dynamic option of renewing Absolute Capital’s mandate to actively manage the funds to maximise returns to investors.’

Following the vote, the funds affected have implemented the restructuring plans as of November 1. Says Absolute Capital chief executive Jonathan Treacher: ‘I am very happy with, and appreciative of, the support shown for the AbCap team, and am confident that fund investors have taken a decision which is in the best interests of all stakeholders.

‘Over the past six weeks, we have listened carefully to fund investors’ concerns and are mindful of the challenges ahead. We will work diligently to deliver value for fund investors through the restructuring process.’

Ogier is also handling the attempts to dispose of the winding-up petition to Cayman’s Grand Court initiated last month by John Bruhl, a shareholder in the Absolute European Catalyst Fund and Absolute Octane Fund, requesting the court to order that the two funds be wound up and that Krys & Associates Cayman be appointed provisional liquidators.

‘With a majority in excess of 75 per cent of shareholders at the meetings voting to continue the funds under the new terms, even if the petitions against two of the funds had any prospect of success, which we do not consider to be the case, we are confident that the court will allow the will of the majority against liquidation to prevail,’ says Ogier senior counsel Chris Russell.

Ogier notes that the endorsement by fund investors of the restructuring plan appears to have given investors increased confidence in the London-listed Absolute Capital management company. Its shares, which fell by more than 80 per cent within three days after Homm’s resignation, climbed 28 per cent on the Alternative Investment Market on Monday 29 October, following the announcement of the vote.

Before the vote, Absolute Capital announced that its Absolute Germany Fund had lifted the suspension of calculation of its net asset value with immediate effect and would reopen to normal subscriptions and redemptions. NAV calculation was suspended on September 20, along with that of the group’s other equity hedge funds.

At the end of August, the Absolute Germany Fund’s net assets stood at USD381m, and its cumulative return since launch in January 2004 was 91.69 per cent. Absolute Capital says it expects that the fund’s administrator, Fortis Prime Fund Solutions (IOM), will release the fund’s official NAV figure for September 30 concurrently with that of October 31 during the third week of November.

The fund will henceforth will be managed by Jens Peters and Antonio Porsia, replacing Stefan Heieck and Frank Siebrecht, who resigned from the company earlier this month citing personal reasons. Absolute Capital says Peters, a German national, has an excellent investment track record with its event-driven and Absolute India funds, while Porsia is the lead manager for the Absolute Large Cap and Absolute Return Europe funds.

Both Peters and Porsia have in-depth knowledge and expertise in the German investment market and in particular the large cap sector, the firm says. Their focus will be on generating absolute performance with an investment bias toward German large cap stocks; realisable liquidity will remain a key investment criterion for the fund.

‘Despite recent events and the fund’s recent negative performance which was attributable in large part to the events following Mr. Homm’s resignation, the fund is on a solid footing and is well positioned to take advantage of favourable trading conditions resulting from the resurgent German economy through 2008,’ Absolute Capital says.

Chief executive Jonathan Treacher adds: ‘The events of the past five weeks have been tough on all of the company’s investors, including those invested in the Absolute Germany Fund. Though the fund was only very minimally invested in the illiquid positions, it was caught in the downdraft brought on by the sudden and unexpected resignation of Florian Homm.

‘We fully expect that the fund will recover from its recent negative performance and that investors who stay invested in the fund will be rewarded in the months ahead. I have full confidence in Jens Peters and Antonio Porsia, both of whom have proven themselves to be talented managers, and have performed admirably through this challenging period.’

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