Blackstone Group, BNP Cardif, Crédit Agricole, and others have additionally unwound or suspended their relationship with H2O.
By Nick Corbishley, for WOLF STREET:
Embattled London-based hedge fund H2O Asset Administration — with €20 billion ($24 billion) of property below administration, down from €30 billion ($36 billion) final 12 months — has an enormous new drawback on its palms: its majority investor, French funding financial institution Natixis, has determined to promote its 50.01% stake. The choice comes after an FT investigation final 12 months revealed that the hedge fund had invested substantial funds in extremely illiquid property, and it raises critical questions on H2O’s future.
H20 “will now not be thought of a strategic asset,” said Natixis in its third-quarter earnings assertion. “Natixis IM and H2O AM have entered into discussions with a view to unwinding their partnership in a gradual and orderly trend.”
A technique of reaching this, the financial institution mentioned, could be by an incremental sale of its stake in H20. The choice could be for H20 to steadily take management of the distribution of its personal funds throughout a transition interval lasting till the top of subsequent 12 months. Both manner, the consequence is similar: Natixis is asking it quits on a partnership that goes again 10 years, to H2O’s inception.
Natixis has not given concrete causes for its choice to chop ties with H2O, aside from as a part of a broader de-risking train. But it surely comes after H2O’s current brush with market regulators in France and Belgium.
On the finish of August, H2O was compelled by France’s market regulator to gate quite a lot of its funds, due to “valuation uncertainties” ensuing from their publicity to high-yielding unlisted securities. These securities are linked to the scandal-tarnished German financier Lars Windhorst, whose enterprise dealings over the previous 20 years have left an extended path of bankrupt firms, stiffed buyers, and unpaid money owed.
By 2019, H2O was one of many largest holders of bonds issued by Windhorst, with holdings of round €1.four billion. At a time of ultra-low rates of interest, the excessive yields provided by these sorts of securities have been like manna from heaven for fast-growth funds similar to H2O and the Woodford Fairness Revenue fund (WEI), which ended up closing for good in late 2019 after the fund didn’t unload its illiquid property rapidly sufficient to satisfy a flood of investor redemptions.
When the true nature of H20’s personal securities was revealed in June 2019, Morning Star determined to downgrade its score of the fund. As occurred at WEI, lots of the fund’s buyers rushed for the exits, eradicating some €eight billion — round 30% of the whole cash parked within the fund — in only one week. Because the funds fled, H2O’s founder and CEO, Bruno Crastes promised buyers he would by no means gate the fund.
Simply over a 12 months later, he broke that promise, on the behest of France’s market regulator. In all, eight funds have been gated, ostensibly to permit H2O to segregate the privately listed Windhorst property from extra liquid property and place them in “facet pockets.” As soon as that was completed, H2O would full the sale of the privately listed property — at a pointy low cost — to a Luxembourg-based consortium of buyers referred to as Evergreen Funding, which was assembled by none aside from Lars Windhorst himself.
However whilst all this was occurring, Belgium’s prime monetary watchdog, the Nationwide Financial institution of Belgium, launched an investigation of its personal into suspicious bond repurchase trades that occurred between H2O and Duet Group’s Benefit Capital NV, which additionally has shut ties to Windhorst.
On October 13, H2O’s gated funds have been lastly reopened, six weeks after they have been shuttered, though an estimated €1.6 billion of buyers’ money stays locked away in facet pockets. Some buyers took no matter cash they may and headed for the exits. Within the house of some days, €429 million was withdrawn. After steadily rising for 9 straight years, the hedge fund’s portfolio of property has now slumped by a 3rd since 2019, from €30.three billion to €20.three billion.
Natixis — itself owned by Groupe BPCE, France’s second largest banking group — has insisted that no matter occurs at H2O, it’ll have “no monetary affect” by itself stability sheet. H2O’s remaining €20 billion in property, as of September 30, are a drop within the bucket in comparison with Natixis’ €910 billion asset base. However H2O did present a disproportionate chunk of Natixis’ earnings, incomes it €211 million in 2019 — over 10% of the banking group’s internet earnings.
The hedge fund is attracting all of the fallacious sorts of consideration and that is elevating considerations about Natixis’ threat controls and oversight. The financial institution has enough problems of its personal to take care of, having suffered vital buying and selling losses within the second quarter as fairness derivatives bets went awry. It is usually heavily exposed to the aviation finance sector, which might see a wave of defaults in coming months.
For H2O, the divorce is prone to be a painful expertise. Natixis has been instrumental in H2O’s success, offering operational help and entry to an unlimited community of deep-pocketed buyers, plus 50% of its working funds, which the agency will now should study to stay with out.
A variety of massive market gamers have already withdrawn their help from H2O in current months. They embody Blackstone Group, which has dropped H2O as advisor of one of many its main funds; French insurance coverage group BNP Cardif, which has suspended allocations to H2O; and French banking and insurance coverage big Crédit Agricole, which has stopped marketing H2O merchandise by its life insurance coverage subsidiary.
The loss for H2O of Natixis, its largest backer, might rupture the delicate belief and remaining confidence buyers nonetheless have in it. Within the wake of the Woodford debacle and the common gating of open-ended property funds within the UK, retail buyers are cautious about entrusting their cash to funds that supply every day redemptions whereas investing closely in extremely illiquid property. By Nick Corbishley, for WOLF STREET.
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