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Absolute Capital sets out restructuring plans for equity funds

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Absolute Capital Management, the London-listed alternative fund manager that saw its share price collapse last week following the departure of co-founder and star manager Florian Homm and

Absolute Capital Management, the London-listed alternative fund manager that saw its share price collapse last week following the departure of co-founder and star manager Florian Homm and the revelation that illiquid positions in thinly-traded shares totalling as much as USD530m could not be accurately priced, has announced that two of the funds initially affected should be able to offer subscriptions and redemptions within eight weeks.

Six of the funds affected by the illiquid positions – the Absolute Return Europe Fund, Absolute European Catalyst Fund, Absolute India Fund, Absolute Octane Fund, Absolute Germany Fund and Absolute East West Fund -suspended calculation of net asset value, as well as all subscriptions and redemptions into or out of the funds, with effect from September 20.

Absolute Capital, which manages debt and property funds as well as eight equity hedge funds, says that its plan to impose a 12-month lock up on the funds while it unwinds the illiquid positions will now cover five funds rather than all seven initially identified as being affected by the problem.

‘While the extraordinary events of the past days have been a significant distraction, our talented fund managers have remained entirely focused on managing our funds,’ says chief executive Jonathan Treacher. ‘As a result, we now have a clear plan for managing the issues relating to the five funds, and by working alongside the funds’ investors we can avoid distressed sales of existing assets and instead protect and maximise value for all investors.’

The collapse of Absolute Capital’s share price, which fell from as low as 48.5p on September 20 from 400p a week earlier before recovering to 67p at the close on September 26, has cost Homm and his ex-wife as dearly as any other investors in the hedge fund manager.

Last Friday Homm sold most of his remaining shareholding in the firm to Andreas Rialas, a director who joined Absolute Capital in January when the company acquired the Argo group, which manages emerging market credit funds, at a rock-bottom price of 35.2p.

The sale netted a reported GBP3.25m, compared with a market value of GBP40m a week earlier. Meanwhile 6 million shares handed over by Homm to his ex-wife and children as part of a divorce settlement earlier this summer have fallen in value from GBP24m to some GBP4m.

The firm says further review of the portfolios of the Absolute Germany Fund and Absolute India Fund has confirmed that the level of illiquid assets, previously estimated at between 1 and 5 per cent for each fund, is 2 per cent and 5 per cent respectively.

‘Unfortunately, due to the instability and loss of investor confidence caused by Florian Homm’s sudden resignation, these funds have experienced high levels of redemption requests and will therefore suspend redemptions for the October 1 and November 1 dealing days,’ Absolute Capital has said in a statement.

‘The funds’ portfolio managers (Stefan Heieck and Frank Siebrecht for the Absolute Germany Fund, Omar Aouane and Jens Peters for the India Fund) have reacted quickly to the events of this week and have converted a significant portion of the funds’ assets to cash. It has been determined to suspend redemptions so as to avoid the funds incurring extraordinary trading losses from having to liquidate further positions to meet short-term redemption requests.’

The firm says it the two funds will reopen to subscriptions and redemptions in not more than eight weeks. At that time, it says, measures will be taken to ensure that remaining investors and new subscribers do not suffer disproportionately from the funds’ small illiquid positions compared with investors that redeem their holdings.

Shareholders in the Absolute European Catalyst Fund, Absolute Octane Fund, Absolute Return Europe Fund and Absolute East West Fund and their associated limited partnership feeder funds have now received details of the proposed restructuring of the funds’ portfolios and share classes to create side-pockets from their administrator, Fortis Prime Fund Solutions (IOM).

Under each proposal, investors will be asked to agree to the amendment to the funds’ organisational documents and offering terms to create the side-pockets, a 12 month lock-in on both the liquid and illiquid/side-pocket share classes, and an amendment to the method of calculating the funds’ net asset values to provide for the re-pricing of illiquid assets by reference to external valuation opinion where appropriate.

Investors’ approval will also be sought that for a resetting of the funds’ high water marks for the purpose of calculating the 20 per cent performance fee in the future. Under the proposal, the high water marks will be reset to the net asset values of the liquid portfolios at the date of implementation of the restructuring.

Investors will be requested to return the circulars indicating their consent to the proposal by October 12. Any fund which does not receive the consent of 66_ per cent of investors by net asset value will be placed into voluntary liquidation, but Absolute Capital’s management says it has receive positive responses from informal discussions with investors representing a significant proportion of the funds’ assets under management.

Under its current offering terms, the Absolute Activist Value Fund provides semi-annual liquidity on six months’ notice in respect of redemptions, and its organisational documents and offering terms already provide for side-pockets for illiquid investments.

The fund will transfer its illiquid portfolio assets to a side-pocket and issue side-pocket shares to investors. Investors will be asked to agree to the rescheduling of next year’s January 1 and July 1 redemption days to November 1, a similar amendment to the method of NAV calculation as with the four other funds, and the resetting of the high water mark in respect of its liquid portfolio as of the date of the portfolio transfer.

The firm says the portfolio of the Absolute Large Cap Fund is highly liquid. After discussions with portfolio managers Antonio Porsia, Gianrito Nicodemo and Alessandro Chiarini, the board has determined that no restrictions on redemptions are necessary because the fund will be able to meet redemption requests normally. Absolute Capital and the fund’s directors have agreed that investors who submitted redemption requests to the Absolute Large Cap Fund in response to last week’s events will be permitted to withdraw the requests.

The board stresses that the emerging market credit funds advised and managed by the Argo group, which is based in the UK and Cyprus and was acquired by Absolute Capital for GBP50.5m in January, remain independent of the group’s equity funds, with separate portfolio advisory and management teams, risk control and reporting and external service providers from the equity fund business.

Homm had no responsibility for or involvement with the Argo funds, the board says. The acquisition agreement provided that the Argo group would be managed under a ‘principle of autonomy’ from Absolute Capital, with Argo’s original principals retaining a veto over changes to operational and management matters and remained ‘controllers’ of the UK and Cyprus businesses for regulatory purposes.

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