High Water Marks Bring Yet Another Bias To Hedge Fund Returns

November 3, 2009

Survivorship and backfill bias in hedge fund returns have been written about extensively. A recent article in Hedge Fund Alert drew out attention to yet another problem with the reporting of hedge fund returns. It turns out that last year’s carnage has left so many hedge funds underwater that the returns posted for this year are not actually what you will earn if you are a new investor.

Hedge funds have high water marks so that managers do not receive the 20% performance fee until the fund has reached its prior high. That is one of the reasons why so many managers simply shut down their funds and launch new ones not subject to that constraint. But it also leads to difficulties with the reporting of returns. Performance fees Read the rest of this entry »


American Community Properties Trust May Attract A Higher Bid

October 6, 2009

American Community Properties TrustSurprise, surprise! American Community Properties Trust (APO) is selling itself. And you won’t even get market value for your shares: while ACPT trades between $8.35 and $8.50 the buyout will happen at $7.75.

The sudden sale at a discount to the market price comes out of the blue for shareholders who still remember the failed attempt by the Wilson family, the 50.68% owners, to take the company private in 2007. The Wilsons had engaged a financial adviser Read the rest of this entry »


Bidding War Looming At Entrust If Shareholders Oppose Thoma Bravo Buyout

July 14, 2009

In a surprise move, private equity firm Thoma Bravo increased the price it is willing to pay for Entrust (ENTU) from $1.85 to $2.00 on Friday. We had forecast that shareholders would vote down the transaction in this post last week, and we suspect that a rejection of the $2 buyout will lead eventually to a bidding war over Entrust. Three other bidders expressed interest in Entrust during the go-shop period at prices higher than Thoma Bravo’s, but the board decided that these proposals were not “superior”. Therefore, we think that there is enough interest in Entrust to make it a candidate for a bidding war if shareholders vote down the current deal. Read the rest of this entry »


Will Shareholders Vote Down Entrust’s Private Equity Buyout?

July 5, 2009

In another illustration of the pointlessness of “Go Shop” periods the board of Entrust (ENTU) ignored three buyout offers received in the 30-day go shop period that were higher than that of the group that includes the CEO. Moreover, the Entrust management buyout shows all that is wrong with buyouts by private equity funds where management remains with the firm and has an incentive to lowball the buyout price. Shareholders expected an increase of the $1.85 merger consideration, and shares traded as high as $2.10 during the go-shop period. We believe that due to the high level of dissent from shareholders and even a board member it will be difficult for management to achieve the required approval by 2/3 of the shareholders. Read the rest of this entry »


Looking For Outperformance? Invest With An Emerging Manager!

June 1, 2009

An ill-advised, persistent and costly error among institutional investors and their consultants is their reliance on large brand name money management firms to look after their assets. We had the privilege of attending and speaking at the recent Emerging Manager 2009 conference, from where we return with some very persuasive statistics that show the outperformance of small money managers over the large mainstream firms. Read the rest of this entry »


SPAC Liquidation Arbitrage: How To Profit From Hedge Fund Redemptions

January 28, 2009

Among the least-damaged victims of the boom’s unwinding are SPACs, which arguable were among the worst manifestations of the irrational exuberance driven by excess liquidity. Despite their relative resilience to the bust, their cash hoards coupled with limited life offer an interesting arbitrage opportunity with yields that, in some cases, reach well into the double digits.

SPACs are an outgrowth of blank check companies, which got a bad name when some were scams run through boiler room operations. The SEC Read the rest of this entry »


In Defense Of Securities Class Actions

September 24, 2008

Former shareholders of Chaparral Resources should receive the proceeds of the settlement with Lukoil (LUKOY) in the next few days. The settlement checks were mailed on Monday, we were told by a lawyer involved in the case. We have written about Lukoil’s shenanigans in the acquisition of Chaparral Resources before. As majority shareholder, Lukoil manipulated Chaparral to depress its stock price and acquire it at a low price. Shareholders filed a class action and are now, two years after the fact, finally receiving compensation. Read the rest of this entry »


WAMU’s Numbers: Financial Restructuring Is Inevitable

July 25, 2008

Washington Mutual, WAMU

Washington Mutual’s (WM) announcement this week that it has no plans to raise additional capital sent the stock up temporarily, but as soon as investors did some simple math on the numbers, it came down to a more realistic, albeit still inflated, number. Wamu boosted its loss reserve to $8.46bn and expects to suffer losses “toward the upper end of the range it disclosed in April” of $12-19bn. If we add Wamu’s current excess capital of $7bn to its loss reserve, we find that Wamu is at risk of running short of capital to pay for the upper end of its own loss forecast. Read the rest of this entry »


Which Bank’s Problems Will Sink Angelica’s Buyout?

July 15, 2008

Angelica buyout mergerIn the pending buyout of Angelica (AGL) shareholders have not just the usual worry about the debt funding, but in an odd twist the equity portion could also be at risk. The financing consists of equity from an entity affiliated with stressed Lehman (LEH), while most of the debt is provided by struggling Regions Bank (RF), with some help from Apollo Investment Corporation (AINV) . Read the rest of this entry »


Restoration Hardware Class Action Payout Still Leaves Shareholders Short Of Full Value

June 18, 2008

Restoration Hardware Logo

Shareholders of Restoration Hardware (RSTO) are the beneficiaries of a class action lawsuit against the buyout that saw the firm go to the low private equity backed bid rather than the higher bid from Eddie Lampert’s Sears Holdings (SHLD). Shareholders will receive an extra $0.19 per share from the litigation in addition to the $4.50 merger consideration. After legal fees, total payout should be roughly $4.63, a 2.9% increase over the price negotiated by the board. Nothing to make you rich, but a lot more than the annual dividend yield of the S&P index. The extra payout explains why Restoration Hardware trades currently a few cents above the $4.50 merger consideration.

Read the rest of this entry »


American Capital Strategies Pulls Out Of Merisel Buyout

June 10, 2008

Merisel logo

Another addition to the graveyard of busted mergers: business development company American Capital Strategies (ACAS) has terminated its agreement to buy Merisel (MSEL) under the “material adverse change” clause that has become a standard excuse for buyer’s remorse. After the exchang of multiple letters between the two firms, Merisel stock reacted predictably with a steep drop and now has a market capitalization below its net cash, despite generating positive earnings and cash flow in 2007. Read the rest of this entry »


Watchguard Private Equity Antitrust Litigation: The Sequel

May 19, 2008

Watchguard BuyoutThe dismissal of the anti-trust litigation against Watchguard and private equity funds Vector Capital and Francisco Partners got all the headlines (here, here, here) a couple of months ago, but a recently filed amendment to the lawsuit over directors’ breach of fiduciary duty makes much more fascinating reading than the somewhat dry anti-trust case. It is also likely to be another milestone in the unraveling of the private equity bubble, because it illustrates to what lengths some managers were able to go to do buyouts on their terms and not in the best interest of shareholders. Read the rest of this entry »