FrontPoint Partners has completed its biggest-ever fund launch,
securing total commitments of over $1 billion for the FrontPoint-SJC
Direct Lending Fund (FSJC).
The launch provides a timely fillip for FrontPoint, which had seen its
asset under management decline after one of its portfolio managers
became embroiled in the US government's insider trading investigation
in late 2010.
FSJC is being run by a team led by portfolio manager Steve Czech, who
joined FrontPoint from Gottex Fund Management in January 2010.FrontPoint started raising capital for the fund at the end of March
2010 and completed its final closing on November 1. Investors include
pension funds, foundations, endowments, family offices and high net
worth individuals. Around 40% of investors are said to be existing
clients of FrontPoint.
FSJC provides privately negotiated senior secured loans to US
middle-market companies with annual revenue of $75-$500 million and
EBITDA of $7.5-$50 million, with a focus on companies in the
manufacturing, transportation and distribution sectors.
Czech said the direct lending strategy was set to benefit from
structural changes in the way companies access capital. "The way
credit is disseminated has changed drastically as a result of the
financial crisis. What we are seeing is a structural change as opposed
to a traditional credit cycle," he said.
"US middle-market businesses have been left with relatively few
financing sources as numerous middle-market direct lenders have either
exited the direct lending business or are gravitating towards larger
borrowers for both strategic and regulatory reasons."
"Credit has become more expensive, less flexible and increasingly
scarce. That creates an opportunity for organisations with clean
balance sheets, no legacy assets and locked-up capital to do very
well," said Czech.
FSJC is targeting returns in the low to mid-teens for loans in the
portfolio.
"On a risk-adjusted basis, we believe the returns from direct lending
are better than they have been historically. The leverage multiples we
are lending at are lower than historical standards and the returns are
the same or higher than in the past," said Czech.
The fund has been carefully structured to avoid the asset-liability
mismatch that undermined many direct lending strategies in the past,
Czech added. FSJC has a five-year life and income is distributed to
clients on a quarterly basis, rather than being recycled into new
investments.
"This is a self-liquidating, cash-generating vehicle. The structure
has considerable appeal for investors that are conscious of
liquidity," said Czech.
The fund started making investments in November and has already lent
around $165 million to US-based manufacturers that act as suppliers to
other companies.
Dan Waters, co-CEO of FrontPoint Partners, said he was "particularly
pleased with the success of this fund given the current market and
fundraising environment."
Waters highlighted the attractive risk adjusted returns available in
direct lending and the structure of the fund as crucial factors in
securing commitments from investors.
The successful launch also vindicates FrontPoint's aggressive response
to the insider trading probe. In November, the Securities and Exchange
Commission charged a French doctor with providing confidential
information about clinical trials to a portfolio manager responsible
for FrontPoint's healthcare funds.
FrontPoint placed portfolio manager Chip Skowron on leave and
liquidated its healthcare funds, returning around $1.5 billion to
investors.
"We had a challenging issue relating to the healthcare funds," said
Waters. "We have been very transparent in dealing with the issue and
provided investors with continuous updates on what was happening with
those funds and the FrontPoint business more broadly. We have are
thankful to our investors who have been very supportive of this
launch."
FrontPoint's assets under management currently stand at $4.5 billion,
down from around $7 billion at the end of 2009.
Source: HedgeFundsReview.Com
