Having a slice of the action
The launch at the beginning of November of the Liberty Ermitage Strategic Partners Fund – a private equity fund of funds mainly investing in European-based, early-stage hedge fund managers, marked the arrival of a relatively new combination of venture and hedge strategies available to European institutional investors. The fund, seeded with $50m (e50m) of proprietary capital, seeks to generate returns from both the underlying hedge fund strategies as well as equity in the underlying fund management partnerships.
According to Jersey-based Liberty Ermitage, the fund has already attracted significant attention from institutional investors, ranging from US pension funds and foundations to US and European investment banks, attracted by its Euro-centric hedge fund exposure and the fund’s enhanced information flows.
And the firm believes that European financial institutions and pension funds will equally be interested in the vehicle as an entry point to the hedge fund industry.
Ian Cadby, group executive director in charge of strategic investments, believes that the current market environment has led to attractive hedge fund seeding opportunities: “A couple of years ago you couldn’t seed hedge fund managers because the market was so hot that they didn’t want you to take equity in the fund.
“Now it is a fantastic investors market for hedge funds. We are seeing good quality hedge fund teams struggling to raise capital and they are willing to cut good deals.“
Furthermore, Cadby argues that the fund’s emphasis on what he terms ‘enhanced transparency’, ‘multi-faceted returns’ and ‘guaranteed capacity’ goes a long way to addressing three key concerns of institutional investors.
On the transparency front, Cadby says that investors will be invited to join a monthly forum to discuss all aspects of the underlying hedge fund activity with each of the managers.
This, he believes, particularly appeals to institutions. “We are going to open the fund up to maybe 100 investors and each one when they invest will be invited to be part of this investment forum. They won’t make any decisions with regards to what the fund buys and sells – but they will in effect be de-facto shareholders of the underlying funds.”
In terms of ‘multi-faceted returns’, he points to an additional advantage of the product in the ‘free equity’ that is received from the fund management companies. Cadby explains that investors will in effect ‘double dip’ into future revenue streams by receiving returns from the underlying hedge fund strategies, whilst sharing in the dividends received from the hedge fund management partnerships. Additionally, it will also negotiate capacity levels with the manager.
In practice, the fund will partner with hedge funds across a range of both directional and spread-based strategies, which Cadby notes could include spread-based arbitrage funds as well as macro, CTA or long/short equity funds.
The company will offer distribution, business and technical advice to its hedge fund partnerships and in return will have representation on the respective hedge fund boards.
Cadby explains where he sees the added value of the approach: “It is typical for fund of funds to insist on transparency at hedge fund level, but how many offer transparency at the business level? We designed this product to offer our institutional investors the maximum level of transparency possible. As a professional hedge fund investor, Liberty Ermitage will be partnering at the business and fund levels, without conflicting with our managers’ day to day responsibilities”.
As a company, it has been seeding and sponsoring hedge fund managers since 1984.
A number of the company’s investment experts are former derivative traders and hedge fund managers and Cadby notes that this is where they can provide the strategic assistance to hedge fund managers on top of the seed capital invested.
He also believes that the $50m of proprietary capital starting the fund gives an indication of the company’s faith in its strategy: “We believe the best way of obtaining transparent information on hedge funds is owning equity in them. Once you own equity you have the right to demand certain types of information that a normal investor doesn’t have, so investors feel this answers the transparency problem.”
The fund’s strategic emphasis will be on quality hedge fund teams and start-ups, such as professionals leaving investment banks: “What we do is to give them jump ups of between $20m–50m, or less for some firms, depending on the deal. In return they might give us 25% of the firm’s equity.”
With Liberty Ermitage on the fund raising trail, Cadby explains that its target is very much the institutional market – pensions and endowment funds, investment banks and large family offices.
The firm expects that the initial offer period for the fund, which is listed on the Irish Stock Exchange, will run from 1 December 2002 to 31 March 2003, with the first subscription period set for 10 February.
The Strategic Partners Fund will charge a 1.5% annual management fee and an incentive fee based on 25% of the equity or other economic participation. Minimum subscription has been set at $10m although the manager has discretion to scale the entry levels.