Credit Crunch Rocks Bain, as Funds Fall Up to 50%

Credit Crunch took tolls on more funds.... Some high-profile Bain Capital credit-investment funds are choking on losses of as much as 50%, said people familiar with the matter, the latest revelation in a day of shake-ups across the hedge-fund business. The private-equity firm's credit affiliate, Sankaty Advisors LLC, has lost between 40% and 50% across two funds that bought up highly secured corporate loans, these people said. The two vehicles had roughly $4 billion in assets just a few weeks ago, and used a relatively low amount of borrowed money to fund their investments. Steep losses have also hit London hedge fund Centaurus Capital LP, which Wednesday offered its investors a chance to cut their fees. And, at Tudor Investment Corp., one of the oldest and best-regarded hedge funds, fund manager James Pallotta finalized a plan to run his own firm separate from longtime colleague Paul Tudor Jones. James Pallotta The developments at Bain, meanwhile, are a blow to a group of top-tier institutions that long have been investors with the Boston-based firm. Harvard University, the Massachusetts Institute of Technology and the University of Notre Dame all have some money invested in Bain's loss-making credit funds. Two of the problem funds include Sankaty's Special Situations and Prospect Harbor. As market conditions have deteriorated, Sankaty has had to seek new, but more expensive, financing for some of its key borrowing facilities. It recently obtained longer-dated terms to stave off margin calls, which typically kick in if asset values fall below a certain price. The funds have not seen significant redemptions, according to a spokesman. The market for leveraged loans -- senior loans issued by banks largely to fund buyout deals -- has plummeted in the last month. A Standard & Poor's index of leveraged loans now trades at 70 cents on the dollar, down from 88 cents one month ago. Until last summer, these senior loans rarely traded below par, or 100 cents on the dollar. In recent weeks numerous "bid lists" have flooded the market, creating overwhelming supply and further damping prices. Money managers such as Bain, Blackstone Group LP and Carlyle Group have piled into this business in recent months, hoping to scoop up low-priced credits of high-quality companies. In many ways, these credit investments were supposed to fill a hole created by the greatly diminished market for private-equity buyouts. Sankaty's Special Situations fund, for instance, was raised in August 2007. To fund these new transactions, loan investors typically borrowed some money to amplify returns. Many used facilities called total return swaps, known on Wall Street as TRS. Under these facilities, if the value of a loan declines to a certain price, the bank can secure more collateral or unwind the contract. The Sankaty funds averaged about a dollar of leverage, or borrowed money, for each dollar of capital that belonged to investors. That level of borrowing was relatively low compared with many other investors, but it shows how even seemingly low-risk bets have suffered as the credit markets have virtually frozen. Sankaty -- named after a lighthouse in Nantucket, Mass. -- was co-founded by Bain managing director Jonathan Lavine in 1997 after a stint in Bain's private-equity unit. The group now employs 150 professionals with commitments of some $33 billion across a range of fixed-income strategies. Along with a handful of Bain executives, Mr. Lavine is a co-owner of the Boston Celtics National Basketball Association team. Widely considered among the sharpest investors in private equity, Bain was founded in 1984 by erstwhile presidential candidate Mitt Romney. The offshoot of consulting firm Bain & Co. now runs about $80 billion in private-equity funds, hedge funds and credit funds. The firm commands the highest fees in the business in its core private-equity funds, charging investors a 30% incentive fee, or that percentage of the fund's profits. Most of its peers charge 20%. Now, more than ever, Bain views Sankaty as central to its franchise. As banks retreat from the financing markets, Bain has styled Sankaty as a lender that can fill the void. Indeed, Bain, Blackstone Group and NBC Universal received financing from Sankaty to help fund its $3.5 billion acquisition of the Weather Channel, one of the year's largest buyouts. Sankaty's troubles could be just the start of problems for Bain, whose core private-equity business made big investments in several large retailers at the buyout boom's peak. Bain owns or co-owns Michaels Stores, Burlington Coat Factory, Guitar Center and Toys "R" Us. The sector has been particularly hard hit by the economic downturn, and a strong Christmas season is crucial for some of these chains. Poor performance has already hit London's Centaurus Capital. Its flagship Alpha Fund gave investors the chance to recoup some cash now in exchange for locking in the rest of their money for two years. Centaurus is proposing to return 30% of investors' cash immediately and lock up the rest of the money for two years with reduced fees. The plans, if approved by investors, would take effect Dec. 1. As an interim measure, Centaurus is restricting the amount of money investors can withdraw to just 10% of assets in the fund. "What we're trying to achieve is to let investors access a lot of cash and at the same time be able to take advantage of the market opportunities that the current dislocation is presenting," said Bernard Oppetit, one of the firm's founders, in an interview.