Thursday, June 19, 2008

AB Cap - Death By a Thousand Cuts

Absolute Capital was once a high flying hedge fund business headed by a flambouyant CEO in the form of Florian Homm. The company was worth close to $400mn and it seemed all was rosey.

It all started to come apart after a seemingly petty argument between the company and Mr Homm. Homm resigned saying that he was unhappy about his managers not getting paid bigger bonuses and the shares fell dramatically.

Then, enter the credit crisis and volatile markets. Ab Cap reviewed their funds and found that a number of funds were heavily weighted with illiquid shares in small companies. Law suits were threathened, shareholders, rightly upset, and a company that Ab Cap had just bought intent on reversing that purchase if things did not go their way.

It looks as if the final cut has been made and Ab Cap will sink or swim on its own.

The company's shares dropped by more than 60 per cent on Monday after an extraordinary general meeting of shareholders held in the Cayman Islands approved a demerger of the Argo credit hedge fund business. At the close on Wednesday Absolute Capital had a market capitalisation of just GBP6.15m, down more than 98 per cent in 12 months.

The slump in Absolute Capital's market value has been interpreted by the market as a sign that the company's value lay mostly or wholly in the Argo fund management business and very little if at all in its battered original equity hedge fund activity.

In May three out of Absolute Capital's eight equity hedge funds are estimated to have lost ground during a month when most hedge fund indices indicated an average gain of around 2 per cent across the industry. Another three of the Absolute Capital equity funds have not yet reported performance estimates.

Argo Capital was acquired by Absolute Capital in January 2007. Its former principals, Andreas and Kyriakos Rialas, are now the largest shareholders in both Absolute Capital and Argo Group with more than 33 per cent of the shares.

Following approval by the EGM of all the resolutions required to authorise the demerger of the Argo business, Absolute Capital will carry out the separation of the two companies by making a distribution of shares in Argo Group to its shareholders. Following this distribution, Argo will be owned independently, albeit by the same shareholders in the same proportions as Absolute Capital.

Absolute Capital's ordinary shares continue to be traded on London's Alternative Investment Market. Argo will initially be a private company, but the newly-independent firm intends to apply for its shares to be admitted to trading on AIM within six months, with Panmure Gordon acting as financial adviser.

The board of Absolute Capital Management Holdings has also announced that Jonathan Treacher has stepped up to become non-executive chairman, and that Glenn Kennedy has succeeded him as chief executive. Kennedy joined the company in December 2006 as general counsel and was appointed to the board of directors in February this year.

In a statement issued before the fall in the company's share price, Treacher said: 'We are delighted with the result of the EGM. The demerger of Absolute Capital and Argo Group is a significant step forward for both companies as they will now be in a stronger position to execute their own growth strategies and enhance overall shareholder value.

'The appointment of Glenn as chief executive is a logical step forward for Absolute Capital as we continue to strengthen our management team to build a solid foundation for further growth and development.'

The Ab Cap story is just a side note to the big situations such as Bear Stearns but it is a sobering thought when you consider the numbers involved. When a company can lose £390mn of value in just twelve months it shows us that, in future, listed hedge fund companies may not have the luxury of keeping the secrets that they so closely guard while taking public money.

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