By Nell Mackenzie
LONDON (Reuters) – Former Odey Asset Management (OAM) portfolio manager James Hanbury has taken short positions against private equity, which will likely struggle to finance and refinance deals as company valuations fall and rates rise, a letter seen by Reuters said.
“We see an increasing probability that private equity’s problems cause considerable collateral damage to the rest of the economy,” said the September investor letter by Hanbury and fellow portfolio manager Jamie Grimston at Lancaster Investment Management.
Hanbury moved to Lancaster Investment Management in July, taking an investment fund and his investment team with him, following sexual misconduct allegations against Crispin Odey, OAM’s founder. Odey has denied the allegations.
Higher interest rates have increased debt payment costs that will pressure companies, drain their cash flows and depress their valuations, the investor letter said.
Private equity has focused its investments on highly leveraged companies that are vulnerable to rising rates including technology, biotech, real estate, infrastructure and renewable energy, it added.
“Floating rate debt accounts for over 70% of borrowings from private equity-linked companies,” the letter said. Payments due on floating rate debt increase alongside interest rates.
Over the next year, the industry will face “a wall of refinancing requirements,” the letter noted.
While many firms have pushed debt obligations into 2023-2024, the Lancaster fund managers intend to focus on firms with debt maturing in 2025.
The WS Lancaster Absolute Return Fund currently has its main short positions in the Russell 2000 index, of which 40% of the companies are loss-making, the letter said.
A short position is essentially a bet that an asset will weaken in price.
This position made a good performance and added to the fund’s positive September returns. Short positions on single named stocks may be added now that the fund has migrated from Odey Asset Management to Lancaster Investment Management and set up lending relationships with its prime brokerages, the letter said.
Prime brokerage divisions at banks lend hedge funds money so that they can take short bets on companies, indices and exchange traded funds.
The 385 million pound fund ($468.04 million) finished September up 4% but still carried a negative performance for the year of 4.7% which included the time before and after the fund left OAM.
The investor letter also showed the fund had a long position on UK-listed hedge fund Man Group and retail conglomerate, Frasers Group.
Lancaster Investment Management, Man Group, Frasers and Crispin Odey did not immediately respond to a request for comment.
($1 = 0.8226 pounds)
(Reporting by Nell Mackenzie; Editing by Sharon Singleton)
