Third Avenue’s assets sink to $5bn in wake of frozen fund
Third Avenue Management’s assets have fallen by more than $1bn this year, six weeks after the company froze redemptions from its troubled junk bond mutual fund, in the latest sign of credit market distress.
The US asset manager oversaw $6.3bn at the end of 2015, but investment losses combined with client redemptions have since cut assets under management to about $5bn, according to three people close to the fund.
US high yield mutual funds and exchange traded funds have been battered by redemptions since the start of 2016, after the asset class suffered its first losing year since the financial crisis.
Third Avenue froze its “Focused Credit Fund” in December, after assets dropped from $3.6bn in July 2014 to under $800m.
However, the fund’s managers were sufficiently concerned to consider alternative solutions more than one year before the havoc caused by December’s freeze, people close to the company told the FT.
By mid-2014, redemptions had already begun to affect the fund as investors grew worried about the impact of a possible US Federal Reserve interest rate rise on fixed income holdings.
Investors can ask for and get back their money from mutual funds on a daily basis, but the distressed and high-yield bonds that the fund holds cannot be traded quickly or in size without significantly affecting the price.
The asset managers knew they were vulnerable if or when more investors asked to redeem, according to people with knowledge of the situation. Additionally, guidelines from the Securities and Exchange Commission limited the fund to 15 per cent in “illiquid” assets, which it already held.
Instead, they decided to raise locked-up capital in a vehicle that better matched the liquidity of the underlying assets. The structure that emerged was that of a business development corporation (BDC), special tax-free closed-end funds created in the 1980s. BDCs trade publicly and are available to retail investors, but they report quarterly, adding a layer of insulation from daily market volatility.
The fund’s managers approached potential partners and underwriters such as UBS and NorthStar Asset Management.
In October 2014, Third Avenue began conversations with American Realty Capital, then headed by Nicholas Schorsch, and held a confidential meeting to discuss raising $1bn in a BDC. While the talks were preliminary, the managers were optimistic.
However the plan was derailed in November 2014 after American Realty publicly revealed “intentional” accounting errors. By the end of the year, Mr Schorsch had resigned.
Less than a year later, investor withdrawals had reduced the Focused Credit fund to less than $800m. On December 9, the fund froze redemptions, the largest freeze of its kind since the credit crisis.