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Britain's Caledonia Buys Offshore Hedge Fund Operator

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LONDON (–Liberty Ermitage Jersey Limited, one of Europe’s oldest and biggest offshore hedge funds, is being sold by its parent, South African insurer Liberty Group, for up to $71 million to a new joint venture 60% owned by Caledonia Investments plc, with the remainder held by Ermitage management.

The deal marks an important foray into the hedge fund sector by one of the United Kingdom’s largest investment trusts. It comes as U.K. financial institutions are scrambling to gain exposure to hedge funds and bolster annual returns.

Tim Ingram, chief executive of Caledonia, told Lipper HedgeWorld: “The investment of pension funds in hedge funds is much lower in the U.K. than in the U.S. We expect to see considerable growth.” Investment surveys, Ingram said, show that the number of institutions across Europe investing in funds will double to 50% by 2007.

He added: “We will certainly be putting some money in Liberty Ermitage funds. We will also look at providing seed capital to new funds.”

Caledonia will put ?? 1/2 5 million ($9 million) in Liberty Ermitage’s Strategic Partners Fund, which provides capital to start-up funds. The investment trust already owns 25% of Polar Capital, a diversified hedge fund operator, and 50% of Eddington Capital Management, a fund of hedge funds provider.

Liberty Ermitage manages about $2.4 billion. Around 70% of that is in 12 funds of hedge funds, with the remainder in money market funds. Its biggest allocation is an Asset Selector Fund with funds of $600 million. Revenues for 2005 were $25 million, including $4.7 million in performance fees.

The acquisition is being financed with cash for an initial consideration of $61 million and up to a further $10 million payable over three years, dependent upon the level of assets managed by the joint venture. Caledonia said it plans to invest $38 million at completion and has underwritten the obligations of the new holding company pending the finalization of external debt negotiations.

As part of the deal, slated to close during the second quarter, the firm will revert to its original name of Ermitage. The senior management team will stay on, led by Chief Executive and Chief Investment Officer Ian Cadby. Executives Mark Hucker, Andrew Whelan, Jonathan Wauton and Sarah Allen have signed five-year contracts under the new company structure.

Although Liberty is giving up its stake in Ermitage, Liberty Chief Executive Myles Ruck said the firm would continue to do business with Ermitage.

Paul Myners, former chairman of Gartmore Investment Management, will invest in the company and will be its chairman. Mr. Myners is well known for his 2001 report on U.K. pension fund management that recommends that pension fund managers explain why they have yet to invest in hedge funds or use derivatives to hedge risk in their portfolios.

Mr. Myners currently is the chairman of Marks & Spencer and of Aspen Re, London’s biggest reinsurance firm. He said in a statement: “Hedge funds and absolute return investments are moving to the mainstream of institutional and private investor portfolios.”

Recently, he has come out about against cheaply priced foreign takeovers of British public companies.

In an editorial published last month in The Sunday Telegraph, Mr. Myners wrote: “The speed with which the board of a target company reacts in the first few days of an offer is now frequently critical to the outcome. This is because many traditional, long-only investors sell out early to hedge funds and proprietary trading desks, often before the target company’s board has had an opportunity to assemble and articulate a defense.”

Mr. Myners’ ties to Caledonia date back to 1985 when he joined Gartmore, a company originally founded by British & Commonwealth Holdings, in which Caledonia was a significant shareholder.

Caledonia is a long established investment company listed as an investment trust on the London Stock Exchange with a net asset value of $1.9 billion. Its strategy is to hold a portfolio of 30 to 40 principal investments with a medium overall risk position.

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Contact Bob Keane with questions or comments at [email protected].


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