NEW YORK (HedgeWorld.com)–After trying unsuccessfully to find an investor or buyer for its beleaguered hedge fund business, PlusFunds Group Inc. has reached a deal to sell itself to FTVentures, a private equity firm that focuses on investing in companies that serve the financial services industry.
As part of the deal, FTVentures will set up a new entity to acquire PlusFunds for $2 million, plus the assumption of about $3 million in liabilities. FTVentures, with $623 million in assets under management, also promised to provide working capital of $5 million and up to an additional $10 million in funding. In all, FTVentures has committed $20 million to buying PlusFunds.
PlusFunds has been hemorrhaging assets under management since December, when a committee of unsecured Refco creditors got a restraining order that tied up some $312 million in PlusFunds assets that the company had at two Refco entities just prior to the October revelations of Refco’s myriad problems. Eventually it became apparent to PlusFunds shareholders that the company couldn’t continue in its present form. However finding a buyer proved a challenge, since no one wanted to assume the potential liabilities associated with the Refco case.
As the company’s financial situation worsened, prospective buyers dropped out one by one. Finally only FTVentures remained. But to close the deal PlusFunds had to file for Chapter 11 bankruptcy protection on March 6. The sale of PlusFunds assets to FTVentures will be made under the supervision of the U.S. Bankruptcy Court for the Southern District of New York.
According to an affidavit filed with PlusFunds’ bankruptcy petition, PlusFunds as of March 6 had assets of $7.8 million and liabilities totaling $3.5 million. As of Jan. 31, PlusFunds had 31 employees and managed $1.24 billion in assets in various funds for which it served as the investment manager and either general partner or managing member. FTVentures will take over the investment manager roles going forward.
PlusFunds paid fees to Standard & Poor’s to license the use of the S&P Hedge Fund Indices name and other interests to create products that tracked the performance of those indexes and that were distributed to investors via various partnerships. FTVentures will assume the licensing agreement with S&P.
PlusFunds paid its partners to distribute the S&P-based products, and some of those firms are listed among PlusFunds’ 20 largest creditors in its bankruptcy petition. Among them are Deutsche Bank’s DB RiskOffice, Raymond James, Merrill Lynch in London and Refco Capital LLC.
It is perhaps this last affiliation with Refco that ultimately forced PlusFunds into bankruptcy in order to sell itself. PlusFunds used Refco LLC as the futures commission merchant for a number of the hedge funds it managed. PlusFunds had FCM accounts with Refco LLC and also cash accounts with Refco Capital Markets Ltd., the unregulated prime brokerage arm of Refco Inc. RCM filed for bankruptcy protection in October following revelations that Philip R. Bennett, Refco’s former chairman and chief executive, kept more than US$400 million in debt owed to Refco off the books through a series of financial transactions between Refco, separate company Mr. Bennett owned, and a third-party hedge fund.
PlusFunds founder and Chairman Christopher Sugrue, who used to work for Refco, spent a good part of Oct. 11, the day after Refco disclosed the Bennett situation, hounding employees in Refco’s New York offices to transfer PlusFunds’ assets out of the unregulated entity. At Mr. Sugrue’s insistence, Refco transferred all of the assets it had on deposit with RCM–about312 million–to a new FCM account at Lehman Brothers Inc. PlusFunds also began unwinding all of its other positions at Refco.
This occurred just prior to RCM’s bankruptcy filing on Oct. 17, and Refco’s unsecured creditors have raised questions about the timing of the transfers. Because of the timing and quick manner in which they were handled, the Refco creditors want the transfers labeled “preferential” by the court so they can recover that money in the bankruptcy proceeding. On Dec. 16, the judge in the Refco bankruptcy issued a temporary restraining order essentially freezing the $312 million until the dispute is resolved.
That affected PlusFunds’ relationship with various third parties that invested in its SPhinX Managed Futures Fund, which tracks the performance of the S&P Managed Futures Index, because PlusFunds essentially had to freeze those assets. PlusFunds notified those parties in a letter sent on Dec. 20 and the news was not received warmly by firms like Rydex Capital Partners, which had 11% of the assets in its Rydex SPhinX fund of hedge funds invested with PlusFunds.
Rydex, in turn, had to notify its investors of the asset freeze. Rydex then told PlusFunds it would redeem all the SPhinX Fund assets it has with PlusFunds. Rydex has not been the only firm to let PlusFunds know it was pulling its business.
In an affidavit filed with PlusFunds’ bankruptcy petition, S. David Peress, who has been appointed the Chief Restructuring Officer for PlusFunds, said the Refco bankruptcy dispute and subsequent redemption notices had a direct and significant impact on PlusFunds’ financial viability.
Since the Refco creditors’ action and the judge’s order became public, PlusFunds–which is referred to as PFGI in court documents, for PlusFunds Group Inc.–has been beset by redemptions, $587 million worth in the latter half of December alone. Between September 2005 and the end of February, PlusFunds lost $1.5 billion in assets, leaving it with about US$1 billion. “?? 1/2 [A]s a consequence of the precipitous decline in AUM, PFGI’s income, most of which is tied to AUM, has decreased significantly,” Mr. Peress said in his affidavit.
He included a chart showing that revenue from management fees fell from nearly $2.6 million in August 2005 to about $1.2 million in January. “It is evident to management that the decline in AUM is accelerating, and that absent immediate restoration of confidence in PFGI’s ability to fulfill its obligations to funds and their investors, AUM will continue to decline,” Mr. Peress said in his affidavit. “Absent immediate reversal of the AUM trend, the fees generated under PFGI’s management agreements will be inadequate to fund PFGI’s operating expenses and the company will effectively be forced to liquidate its assets at prices that would yield little, if any, value for the benefit of PFGI’s stakeholders.”
Among those stakeholders is an entity named in the affidavit as Suffolk LLC, which owns 42.47% of PlusFunds. Suffolk is one of a number of PlusFunds’ so-called controlling shareholders to which Refco Capital LLC loaned money in 2005 to finance the buyout of other PlusFunds shareholders. According to Refco bankruptcy documents, Suffolk LLC is listed as owing $159.5 million in principal and interest to Refco Capital. Other Suffolk entities–Suffolk-KAV LLC, Suffolk-MKK LLC and Suffolk-SUG LLC–also owe Refco Capital money and interest for loans. Suffolk-MKK and Suffolk-SUG each owe about $20,000 to Refco Capital, according to court documents, and Suffolk-KAV owes nearly $12,000.
An entity called MKK Ltd. is listed in Mr. Peress’ PlusFunds bankruptcy affidavit as owning 10.36% of PlusFunds. Mr. Sugrue is listed as owning 10.44% of PlusFunds. A man named Mark Kavanagh is listed as owning 6.11% of the company.
The loans Refco Capital made were to be secured by the PlusFunds shares owned by the controlling shareholders. According to provisions of the loan, Refco Capital could have acquired all the shares, and thereby PlusFunds itself, in the event of a default, hence the need for PlusFunds to file for bankruptcy and negotiate a sale of assets. The status of those loans as they relate to Refco’s own bankruptcy is unclear.
Enter FTVentures. Once PlusFunds agreed to file for bankruptcy, the deal was consummated following two weeks of negotiations. FTVentures Partner Brad Bernstein said in a statement that his company likes what it’s getting in the deal.
“PlusFunds’ distinct capabilities provide investors unmatched access to a broad range of hedge fund managers across numerous investment styles, including the SPhinX suite of hedge fund index products,” Mr. Bernstein said. “PlusFunds’ innovative platform is engineered specifically to give hedge fund investors a rare level of transparency, independent oversight and control.”
The sale is subject to bankruptcy court approval and other conditions. PlusFunds has asked the court to approve notice and bid procedures. The sale is expected to close in mid- to late April. Other qualifying bidders will be able to submit bids for PlusFunds through a court-supervised competitive bidding process.
Contact Bob Keane with questions or comments at firstname.lastname@example.org.