FlNANCIAL nMESMONDAY AUGUST 92010
FTfm
The asset-based
lending industry
after the disaster
Altcmativcs
Hedge funds with an ARL strategy found
themselves paralysed by the credit crisis.
Many rusa,ppeared, some morphed into
equity owners and other niche funds
survived. Eric Uhlfcldcr rep0l1s
B
efore becoming a
hedg\! fund manager,
ROlli DersovllZ waa a
lawyer who knew first-band
the cash flow challenges
confronting attorneys who
work on contingency. With
legal settlements being
fairly iron clad, he decided
to jump occupational aisles
and set up shop providing
short-term loans 10 lawyers
against fees assured
through settlements.
Since establishing his spe-
cialised asset-based lending
fund - RD Legal Capital - in
October '}fJ(fl, he has never
had a down month. inves-
tors, who receive cumula-
tive preferred notes, earn a
fixed 13.5 per cent a year.
As the fund's sole principal,
Mr Dersovitz is left with
annualised profits of 1.5 per
cent or the total assets -
$77m (t48.5m, €S8.5m) at
the end or May.
Mr Dersovltz's fund char-
acterises the appeal of
asset-based lending. While
ABL managers aro con-
cerned how a business
makes money, Its risks,
past performance and pros-
pects, they are more
focused on the value or a
particular asset against
which they aro lending. By
doing this, the odds of gl!t-
ting repaid If a business
fails Increase.
ABLs lend against a wide
variety of assets: real
estate, accounts receivahles,
inventory, film distribution
rights, and life aasuranoo
policies - about :JO different
such categories in all.
While the practice of
lending against assets is aB
old aB the hills, aB a hedg\!
fund strategy, It dates hack
only 20 years. It took off
after the 200G-2002 market
meltdown aB institutional
managers scurried for
investments that were sim-
ple to undel'litand, transpar-
ent, and a more effective
cap on downstde risk. ABLs
were not going to make
anyone rich. But the idea of
consistent returns of 8- t2
per cent a year sounded
very appealing after portfo-
liO!! crashed in the tech
wrnck.
According to data tracker
HedgeFund.net, ABL funds
returned 12.7 per cent in
2007 (before the recent
crisis). Performance
dropped off the following
year to 5.3 per cent before
picking up in 2lJO!l to 6.2 per
cent. But this waa signifi-
cantly affected by survivor
hias, which bolstered
returns and belled the story
that was evolving.
The shutdown of the
credit market made it diffi-
cult for borrowers to refi-
nance after their loans
matured. The cushion of
high asset-to-loan ratiO!l col-
lapsed, hitting ABL balance
sheets. And unprecedented
levels of investor withdraw-
'More than 150
asset-backed
lending funds are
winding down or
reorganising into
new funds'
als fon:ed many funds to
gate or suspend their funds
to avoid fireselling assets..
While It does not track
the entire ABL universe,
HFN reported 92 funds in
its index at the end of 2008,
three shy or the peak
reached two quarters ear-
lier. Yet, by the end or 2009,
the number was almost cut
in half, with only 51 funds
reporting as funds clll!led
or simply chose to stop
reporting because of poor
performance.
Jonathan Kanterman,
managing director at New
York-based Stillwater,
which had run as much as
,Ibn in several ABL funds
and funds of funds,
observed thai ~more than
150 asset-backed lending
funds that had three-year
track records or more. with
at least ,IOOm, are winding
down or reorganising tnto
new funds".
His firm's flagship Still-
water Asset-Backed Off-
shore Fund, which had
more than $3OOm, had
enjoyed live-year annual-
ised returns of approxi-
mately 7 per cent until the
end of August 2009. Like
many ABL funds, Still-
water's strategy comprised
loans, of less than 12
months, to importers,
exporters and energy
remarketers looking for
temporary loans against
receivables; and medium-
tenn loans or between 12-36
months to law, real estate,
and life assurance groups
against pending settle-
ments, propeny, and poli-
cies, respecttvely.
Paradoxically, it WaB not
realised losses that dis-
rupted Stillwater and many
other ABL funds, but rather
when bankB suddenly
pulled their leverage facili-
ties from funds or funds
that had been investing
in Stillwater. While this
improved bank liquidity at
the likes of Belgium KBC
and French BNP Paribas, it
had a disastrous effect on
the ABL industry. It
revealed liquidity risks
when assets and liabilities
are mismatched.
Funds of funds were sud-
denly forced to redeem from
underlying funds, and there
was not enough liquidity or
new money coming in to
offset unprecedented out-
flows. Investments rrom Alraan _Ill one of the many types of assets some fUnds decided n was better to own AIoJry
funds of funds sharply
declined. In October 2lJ08,
2S ABL FoFs with more are structured along loans loans. The fund WaB up by secured lender at annual-
than $Uhn in assets were of various maturities that more than 50 per cent in ised rates of 14-18 per cent.
rnporting to HFN; as of the even in a stable llCOnomic 2009 and 5.2 per cent Manager Pablo Marino
first quarter 2010, the environment can't be through the first five hedg\!s foreign exchange
number fell to live with less quickly unwound, espe- months or Wto. risk and his spread is about
than $92m in assets. cially when involving long- But some small, well- 900 basis points over his
To meet redemptions, er-term assets such aa real rocused ABLs have not own financing costs.
ABL funds initially sold off estate," says Mr Kanterman. needed to morph into More recently, Mr Marino
the most liquid, desirahle For many ABL managers, equity owners. has looked c10seT to home.
assets. But that failed to the flIlllIlcial crisis and the Since starting up in the ~Though we originally
raise enoogh capital. So to suhsequent fall in asset val- autumn or 2003 as a short- sought to support Interna-
protect investor equity and uations prompted a shift in term lender of first mort- tiona! trade, we now see
asset values, most ABL strategy away from pure gage bridge loans for com- l!Ven greater opportunity in
funds gated or suspended lending toward greater own- mercial and multi-residen- lending to solid small busi-
redemptions. ~ABL funds ership of assets. tial properties, the W Finan- ness here in the states, aB
David Shiff, manager of cial Fund has produced local banks fail to boost
Perella Weinberg's $362m annualised returns of lending." Two-thirds of his
Asset-Based Value Fund, 10.4 per cent to June. The loans are now strictly
realised early on that with ~ fund has never fore- domestic.
valuations falling drasti- closed on any loans and Since inception in 0cto-
cally, the fund could be bet- has oot suffered a single ber 2006, the fund's net
ter off owning assets. down month. According to annualised return has been
Assets in his portfolio principal Gregg Winter, the U.8 per cent through June,
include aircraft, railroad rund's success is hased on with only four losing
cars, and barges; trucks and lending against assets months. So successful is
containers: and office and of improving value sup- Savile that Mr Marino says
restaurant equipment. ported hy quality or loca- he could easily TlIise twice
As the financial cri- tion, sponsorship, and low the capital.
sis deepened, acquisition costs. BUI like many niche
Mr Schiff found The $33m Savile Opportu- asset-hased lenders, Mr
greater opportunity nity Fund haB also contin- Marino says greater size is
in buying second- ued to find lending opportu- not necessarily better. He
ary loans at deep nities. It provides short- limits asset growth know-
discounts from term trade financing to Ing that when financials
distressed own- Latin American companies start to lend and invest
ers, such aa from with annual sales or no again, his margins and
banks In receiv- more than $5Om, lending capacity to fmd suitable
ership, instead or against accounts receivable borrowers may become
originating new where there Is 00 other more challenged.