Third Avenue Weighs Sale of High-Yield Fund That Halted Redemptions in December
New York firm taps Houlihan Lokey to shop Focused Credit Fund
Third Avenue Management LLC is weighing a sale of its high-yield mutual fund, whose meltdown spooked investors and fueled a selloff in the junk-bond market late last year.
The New York firm tapped investment bank Houlihan Lokey Inc. to shop its Third Avenue Focused Credit Fund, which had assets of $592 million as of June 30, according to people familiar with the matter. Proceeds from a sale would go to the fund’s investors, who lost the ability to withdraw money when the firm halted redemptions in December.
The firm also is exploring a deal under which another asset manager would team with it in managing a chunk of the fund’s assets, which could repay some of the money owed investors while offering a buyer control over some of the portfolio, the people said. Any deal would be subject to approval by the fund’s investors and the Securities and Exchange Commission, they added.
A sale could help remedy a painful saga for investors in the fund, which offered the freedom to cash out at any time alongside the potential rewards of betting on risky companies’ debt. That combination proved untenable late last year, when heavy selling in junk bonds fueled a rush to the exits among investors.
To avoid a fire sale of the fund’s assets, Third Avenue locked up investor money. The move, nearly unheard of for a mutual fund, shocked the market and left a black mark on Third Avenue, an investment firm founded by renowned value investor Marty Whitman.
The meltdown led to the dismissal of longtime Third Avenue executive David Barse, who was escorted out of the building after the firm’s management committee rejected his plan to sell the fund’s assets to private-equity firm Fortress Investment Group LLC, The Wall Street Journal reported.
The episode sparked broader fears about the health of the market for risky debt. Some banks and assets managers have argued that credit-market liquidity has deteriorated since the financial crisis due to new rules limiting banks’ traditional role facilitating trading in mutual funds, exchange-traded funds and similar products.
The Third Avenue incident prompted the SEC to conduct emergency examinations of about 80 mutual and exchange-traded funds that invest in high-yield bonds, bank loans and other risky, hard-to-sell assets. The regulator concluded that other funds didn’t pose the same risks as the Third Avenue fund, the Journal reported.
Junk bonds have since rebounded, with the Barclays U.S. corporate high-yield index returning 9% this year through June. The Third Avenue credit fund, which contains harder-to-trade assets than those held by many of its peers, is down 0.8% during the same period, according to its most recent fact sheet.
Since it halted redemptions, the fund has been selling assets and has made two distributions to investors. It is possible that by selling a chunk or all of the fund at once, it could appeal to buyers looking to acquire large positions at once or who want to get into the mutual fund business.
It is unclear what price the fund might fetch. The portfolio contains about $100 million in cash and a mix of public and private debt and equity investments, some of which are closely held and rarely or never trade publicly, according to people familiar with the fund. As a result, bidders might quibble with the firm’s valuation of the assets.
The fund has attracted interest from asset managers that traffic in high-yield and distressed debt, the people said. As part of a deal, the fund’s existing portfolio managers could continue to oversee its assets, they added.