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Third Eye Capital – Best Credit Fund Manager

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Toronto-based Third Eye Capital originates and manages privately-negotiated secured loans to predominantly Canadian small- to mid-cap companies. The firm was established in 2005 by Arif N Bhalwani (pictured) and Dr David G Alexander, who together have more than 50 years’ private market investing experience.

By operating outside the traditional capital markets, Third Eye has established a solid reputation in the private lending space, delivering absolute returns to its investors with low volatility and low correlation to both debt and equity markets. The firm’s investment philosophy is based upon disciplined credit selection, extensive collateral monitoring and active portfolio management.

Third Eye provides direct loans to Canadian companies that tend to be perceived as risky because of their size or development stage. “The key theme in all our investments is that they require a type of analytical framework and due diligence intensity that banks aren’t necessarily well equipped to handle,” Bhalwani says. “Our returns are essentially coming from exploiting this inefficiency in analysis.”

The firm was founded with a CAD300m mandate from one of Canada’s largest pension funds. In 2008, the firm launched a credit hedge fund on the back of investor demand. It is for another fund using a similar strategy, the Insight Fund launched in May 2010, that Third Eye won this year’s Hedgeweek USA Award for Best Credit Fund Manager.

“In any given year, our goal is to fund between 10 and 20 different transactions,” Bhalwani says. “Anywhere from 400 to 700 transactions are analysed before we settle on the companies to whom we expose capital.” The firm focuses on companies where capital needs range from USD1m to USD30m, with the sweet spot between USD10m and USD15m.

“Our due diligence is very hands-on and rigorous,” he adds. “The structuring process takes about 40 to 60 days to complete from the moment we source the deal to the day we fund it. We then typically hold that exposure from one to three years.”

The major difference between Third Eye and other hedge funds is that it isn’t looking for trading opportunities, but rather investment opportunities. Having an all-weather strategy has allowed the firm to avoid having a single loss in the portfolio since 2005.

“Trading is a zero-sum game,” Bhalwani says. “We’re not traders, we’re investors. We directly negotiate loan terms with companies, so when we’re dealing with our counterparties we need it to be a win-win situation. I think of return on investment, while David thinks of return of investment.”

The biggest challenge last year, he says, was the borrowers themselves. There was a degree of tentativeness on the part of companies about taking on additional capital expenditure due to uncertainty over demand and improvements in capacity utilisation. Third Eye hoped to double its loans in 2010, but they remained at a similar level to the previous two years, but like yields they are still elevated compared with historical levels.

“We think sentiment is going to shift, and we’re beginning to see that at the margin already,” Bhalwani says. In total the firm manages assets of approximately USD150m, and it hopes to triple this to around USD500m by the end of next year.

Of winning the award, Bhalwani adds: “We’re very grateful for the award as it comes from the recognition of our peers. Without our exceptional team and the support of our investors, we wouldn’t have been able to perform as we have. That has allowed us to prosper.”

Please click here to download a copy of the Hedgeweek Special Report: Hedgeweek USA Awards 2011

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