Investors are beginning to focus more on long overdue redemption demands from funds with continued illiquid assets, according to findings from Kinetic Partners, a professional services firm to the asset management, investment banking and brokerage community.
Kinetic Partners estimates that there may still be upwards of $100 billion of assets tied up in illiquid hedge funds that have yet to be realized and returned to investors since gates, redemption suspensions and other restructuring efforts were implemented during the 2008 economic crisis.
Several factors -- such as indefinite redemption suspensions, unsuccessful restructuring arrangements, ineffective wind-down strategies and, in some cases, public scrutiny over valuation -- are prompting investors to become more aggressive in pursuing a return of value. The general extended rally in the markets has also increased investor desire to recoup investments in distressed assets.
"Given the very limited options available to investors, such as secondary market sales of their fund interests, we've seen a notable increase this year in the number of investors elevating efforts to realize their holdings in these funds through targeted legal actions against the underlying funds or, in some cases, the fund managers themselves," says Geoff Varga, a member at Kinetic Partners who leads the firm's distressed funds practice. "That can be particularly disconcerting for these types of fund managers, as any run on the fund -- real or perceived -- may affect the realizable value of the portfolio of assets."
Varga continues: "Although most investors and advisors would agree that a fire sale of the assets is not the best method for extracting value, maintaining the status quo -- or suggesting a material extension to the two-to-three year realization plans that were laid out in 2008 and 2009 -- is likely not an acceptable proposition to the concerned investor who is focused on redeeming their money to take advantage of other investment opportunities."
He predicts, "We anticipate the next 12 months will require a great deal of care and thought by both the fund managers and the investors to effectively manage out these potentially divergent realization strategies."