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H2O’s Investors Will Rue the Fund’s Illiquid Adventure

Mark Gilbert

(Bloomberg Opinion) -- Investors whose money is trapped in eight funds run by H2O Asset Management are learning a hard lesson in what can happen when a portfolio manager is seduced into buying illiquid securities.

It’s been more than a year since the Financial Times reported that H2O, part of Natixis SA’s fund management stable, had loaded up on bonds issued by companies related to German entrepreneur Lars Windhorst. In a letter just sent to its clients, H2O now says it’s marked down the value of those investments by 60%.

Moreover, at least one of the bonds H2O invested in seems to have passed its original maturity date without being repaid. The fund owns about 77% of a 500 million-euro ($590 million) bond issued by Chain Finance, a Windhorst company. That bond was scheduled for repayment on Aug. 11; instead, the maturity date has been extended by 90 days to Nov. 11, according to data compiled by Bloomberg.

In May, H2O agreed to sell the private investments back to Windhorst. Bloomberg News reported last month that Windhorst was securing financing to repurchase notes with a nominal value of more than 2 billion euros, at a discount of about 50%. In other words, H2O would forgo about 1 billion euros to get the investments off its books.

Now, the asset manager says the transaction has been held up. “Completion is delayed, and we are not able to predict when it will be completed,” H2O said in the letter dated Wednesday.

Investors are currently trapped. Last month, the French regulator intervened and ordered the company to halt redemptions from some of its portfolios due to “valuation uncertainties on the significant exposure of these funds to private securities.”  

That’s an embarrassing slap for Bruno Crastes, H2O’s co-founder and chief executive officer. But where does it leave his investors?

Well, those with cash in the 3.4 billion-euro MultiBonds fund face having as much as 30% of their money split into a so-called side pocket that will own just the illiquid Windhorst securities. Holders of the 887 million-euro Allegro fund could see 35% of their investments allocated to the private debt that, remember, H2O has already marked down by 60%.

And while H2O says it has additional collateral in the form of shares of Windhorst’s Tennor Group companies that could improve those numbers, that’s not a given. It goes on to say that “the downside risk is that these estimates could be significantly marked down should the Tennor Group companies come under major difficulties.” Moreover, it’s far from clear whether Windhorst will in fact repurchase the debt.

As Neil Woodford and GAM Holding AG learned to their cost, investors are quick to pull their cash from funds that get caught out when hard-to-sell securities turn out to be, well, hard to sell. At the end of 2018, H2O oversaw about $33 billion; by June 30, that was down to about $26 billion. The risk is that, once investors have their withdrawal rights back, there’s a stampede for the exit that will make H2O a much smaller player. It’s an ironic outcome for a fund named after the chemical symbol for water.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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