The hard lesson of 2008 for alternative asset managers was how to create liquidity quickly, and sufficiently to satisfy investors on demand. To prevent the fire-sale of assets at distressed prices to satisfy these demands, many funds raised gates or suspended redemptions.
While these strategies proved somewhat successful in the short-term at preventing those distressed sales, those same funds now must address the stigma associated with employing such tactics.
The obvious worry is that as capital returns to the alternative asset management space, those once locked-out investors will look for funds that orderly handled the onslaught of redemptions versus simply throwing up gates or indiscriminately suspending redemptions.
Many funds that performed well in 2008 (relative to the overall markets) were still struck by these mass redemptions. Investors were driven to look for liquidity wherever they could find it and most managers did not have the systems in place to effectively address these redemptions in an organized manner.
These managers were forced to look for help from outside parties in many instances remedial steps were taken to address the funds’ lack of liquidity. Some managers, however, being proactive are taking steps to prepare in advance for any worsening of the current fi nancial crisis.
The best way to address current concerns as well as help insulate against any future liquidity concerns is to consider having an external independent firm evaluate strategic alternatives for the Advisor and the Funds. This analysis is individualized for each fund as to address the liquidity issues the fund is currently facing, its future liquidity risks, and explores several alternatives
for the advisor and funds, that may include (non-exhaustive):
1.) Creation of a side pocket(s) or a liquidating entity;
2.) Creation of a redemption share class and a new share class;
3.) Wind-down of the Funds and creation of a new fund(s);
4.) Financing for the Funds, including bank syndications and/or
5.) Limited auction-bid process for redemptions;
6.) Sale or partial sale of the Advisor or the Funds;
7.) Seed capital for a new fund(s) or capital infusion in the Funds;
8.) Evaluating strategies for the Advisor and the Funds; and
9.) Do nothing / Status-quo.
These strategies are to help accelerate the redemption or repurchase of interests in the funds by investors who sought, or may in the future seek, redemption of their interests in one or more of the funds.
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