The decision to freeze redemptions at high-profile Lawrence Partners Fund highlights the nightmare facing hedge funds that bought private and illiquid public securities during the commodity boom.
Like many Canadian hedge funds, Lawrence Partners snapped up private placement junior resource financings and portions of private equity deals over the past four years. When times are good, that's a winning strategy - 5 cent shares in a promising coal play can suddenly become $7 shares.
But when markets tank, prime brokers pull leverage and investors start redeeming, illiquid securities are a millstone. Lawrence Partners -- a fund run by Ravi Sood and backed by former Burns Fry CEO and legendary bond trader Jack Lawrence -- simply can't exit some of its positions.
So Lawrence Partners, down 65 per cent year-to-date, has frozen redemptions for 60 days. In a note to clients, Mr. Sood said: "We believe there is value embedded in the illiquid public securities and in the private equity holdings, but it will take time, management and an improvement of market conditions for this value to be realized."
Lawrence Partners is now carrying the value of these private investments at cost, "unless there has been a clear change in value."
While understandable from an accounting point of view, valuing a private placement at cost these days is likely a generous assumption. This sector of the market has been hammered, and most fund managers would be thrilled, and running for the exits, if they could sell private holdings for the same price they paid.
Mr. Sood and Mr. Lawrence have a considerable amount of their own wealth tied up in Lawrence Partners, now a $70-million fund. It's going to take all their skills, over a long period of time, to fix this fund.