Wednesday, November 26, 2008
Perot Fund Liquidates as Debt Bets Turn Sour
Last week's record plunge of the commercial real-estate securities market has claimed its first major casualty: a $1.5 billion fund with investors including Texas billionaire H. Ross Perot and members of his family, said people familiar with the matter. Other hedge funds and money-management firms that invested in real-estate debt face the potential for more margin calls. These include a $2 billion fund managed by Petra Capital Management LLC, a firm founded by Andy Stone, one of the founders of the commercial-mortgage securities business. Also, Guggenheim Partners LLC, one of the best-known managers in the business of investing in commercial real-estate debt, recently asked its investors for about $300 million in additional capital to help one of its debt funds to pay down borrowings. And Centerline Holding Co., the asset manager led by real-estate mogul Stephen M. Ross, is talking to its lenders to restructure its loan obligations. Mr. Ross and Edward L. Shugrue III, manager of real-estate debt funds for Guggenheim, declined to comment. Andy Stone The woes of these funds promise to put more strain on the banking sector. Banks that have made short-term loans to these funds mightn't recoup all their money even if the funds liquidate. Parkcentral Global Hub Ltd., the fund overseen by Parkcentral Capital Management LP, a Plano, Texas, firm controlled by the Perot family, peaked this year at $2.5 billion in assets. It used borrowed money to amplify its bets, said people familiar with the matter, and began dumping assets last week. That leverage helped hasten the fund's meltdown as the commercial mortgage-backed securities, or CMBS, market cratered last week, and the borrowings also could leave lenders with tens of millions of dollars in losses, the people said. A Parkcentral spokesman Tuesday confirmed that the fund has been forced to liquidate to pay off creditors, but he declined to elaborate. He blamed the "unprecedented upheaval of the capital markets in general and the freezing of credit markets in particular." The nose dive of commercial real-estate debt marks the latest blow for hedge funds, which globally are having their worst year on record. Some investment managers are trying to persuade investors to pony up more money to shore up funds. Oregon Investment Council, which manages the $54 billion Oregon Public Employees Retirement System and is an investor in the troubled Guggenheim debt fund, has agreed to make an additional $100 million commitment to the fund, said a spokeswoman at the council. But she said the commitment is contingent on, among other things, Guggenheim's ability to raise the $300 million for the fund -- including at least $50 million from new capital sources other than existing investors. Petra has met margin calls by using cash on hand and asset sales, said a person familiar with the fund. But "if the market continues to break, everybody will be big losers," said this person. The structure of the Petra hedge fund was creative, complicated and risky, all hallmarks of the deals done by Mr. Stone, a former star banker at Credit Suisse First Boston who left the firm in 1999 after his real-estate-finance group flamed out in the wake of the Russian debt crisis. At its peak, Petra leveraged the $418 million it raised in equity to buy $1.6 billion in high-yield commercial real-estate debt. Key to the fund's success was its ability to borrow at much lower rates than those being paid by the debt it was buying. It did this initially by borrowing short-term money on the "repo" market. Then Petra's plan was to pay off the short-term loans by packaging the debt (not short term loans) it purchased into a long-term collateralized debt obligation and selling it to investors. By doing that, Petra insulated itself from margin calls because it wouldn't have to repay the CDO bondholders before its assets matured. But Petra's strategy was tripped up by the market. It succeeded in selling one CDO totaling $1 billion. However, as the credit crisis intensified, the CDO market collapsed. That left Petra holding some short-term repo debt. The firm already has paid off about $140 million in that debt but still has about $160 million remaining.