Monday, December 22, 2008

Bramdean Alternative’s solvency problems

In my last post on Bramdean Asset Management (Nicola Horlick’s business) I suggested to Ms Horlick that she should make a statement to the stock exchange about how Bramdean Alternatives (what the website describes as the “flagship fund”) intends on funding capital calls by the private equity funds that they have invested in.

The problem of course includes that part of the money intended for capital calls was invested in Madoff Securities (via Defender – a Madoff feeder fund).  

No statement from Bradean Alternatives as how they plan to meet capital calls has been made.  In most jurisdictions a listed company has an obligation to keep the market fully informed.  However, failing a statement from Bramdean I thought I might spell the issues out.  

Almost all of this comes from the half yearly management accounts.

First the company has very substantial capital calls.  The half yearly statements detail them:

The Company was 88.8% invested at the end of the second quarter 2008. It has made commitments to sixteen underlying private equity funds and underlying specialty funds amounting to approximately US$224 million and the total amount that has been drawn-down on the commitments made is approximately US$59 million.

This is a very real problem.  The company has obligations to pay capital calls on funds it has already invested in of US165 million.  That is not chump change.

Moreover the most liquid parts of the portfolio – Madoff investments – are suddenly seriously illiquid.  Defender (a Madoff feeder) was specifically earmarked as part of a transitional portfolio – transitional because it was a place-holder for funds intended to meet capital calls.  (Fortunately however - and to give Bramdean some credit - they have raised some cash this year to meet capital calls.) 

Bramdean Asset Management thought that it was perfectly reasonable to overcommit Bramdean Alternatives: 

At 30 June 2008, the Company’s commitments to private equity and specialty funds accounted for 85.3%of its assets, representing an over-commitment of 1.22X, based on the Company’s commitments as a share of total net assets.  Any over-commitment may be managed through the Company’s cash holdings, through redemptions from the Transitional portfolio and through the use of gearing. The Company may gear by up to 25%of its net asset value, but has not employed this facility and had no debt at 30 June 2008.

In particular they thought that they could manage this by selling their “transitional portfolio” (that is Madoff), from cash holding and through the use of gearing.

Now the portfolio is down a lot since June 30.  At June 30 it was 263 million.  By October is was 220 million – and the private equity commitments were thus proportionately larger.  

Moreover they have not done spectacularly well in November and December will have wiped out the Madoff moneys (about 20 million more).  NAV is likely to be below US200 million – and the commitments to illiquid private equity type funds are over 220 million the majority of which has not been called.  Cash was about $50 million.  It will be very difficult to meet calls.

Oh, but in the June report they thought they could borrow the money to meet the capital calls.  That is what it says.  Now Nicola’s much vaunted due diligence process has been exposed as vacuous by Bernie Madoff – and the credit markets have tightened considerably – it is highly unlikely that anyone is going to lend Bramdean Alternatives money secured by the equity interest in a whole lot of 2007 private equity portfolios.  

Nicola Horlick lambasts her critics as sexist – and I admit I did call her a silly silly girl.  But capital calls are not gender specific and the cash drain and resulting insolvency is independent of Nicola’s gender.

I am sorry to say it – but Ms Horlick’s flagship fund looks like toast.  Maybe there is sufficient secondary market in the private equity funds for the fund to survive – but I doubt it.  

Maybe the capital calls will not come.  But I also doubt it.  It is however very hard to tell from the published accounts as the due date for the capital calls is not outlined.  

Moreover if they start testing the market for secondary pieces of funds applied for twelve months ago they will (at best) have to take very considerable write-downs.  The asset value of Bramdean Alternatives hardly reflects current market values on private equity investments made 12 months ago…

I consider this case more than just another piece of Bernie Madoff collateral damage.  It’s a real live case – and resolution is necessary for the restoration of trust to British Capital Markets.

What happens when this finally hits the wall?

It is not enough for the FSA to write off the looming insolvency of Bramdean Alternatives as just another credit crisis meltdown.  Bramdean made some very strong statements about how they do due diligence.  They made them in a prospectus and in annuals.  Here is the statement from the annual.  

The investment process is systematic and disciplined.  Due diligence is at its heart and around 3-4 months are typically spent analysing a potential manager, a process which includes a number of on-site visits with that manager. The process culminates in the provision of a detailed report that is then presented to and discussed at Bramdean’s Investment Committee, where a selection decision will be made on all private equity funds, specialty funds, and transitional investments. That Committee has to approve an investment unanimously before it can proceed. Where required, Bramdean will also conduct legal diligence.

Ongoing monitoring is similarly robust and includes regular reviews of market conditions and their potential effect on the underlying funds and any direct private equity investments. In response to the conclusions drawn from this process, the Investment Committee will decide whether or not to retain an investment.

There is little evidence that the statements are true (though I will take Nicola’s word for it).  Bernie Madoff famously did not let people do due diligence on him, but almost certainly Nicola – with her feminine charms was the exception.  Anyway if the due diligence was not done in the manner advertised – and moneys were raised on that basis then this is not just an unfortunate credit crisis bust but the raising of money on what look like false pretences.  But of course Nicola did the due diligence on Madoff, including several on-site visits and analysis over 3-4 months.

John Hempton

PS.  Nicola said her critics were sexist.  

Nicola wrapped the noose around her neck when she invested with Madoff.  The hangman has now pulled the lever.

It doesn’t matter one iota that the body is a woman and it is delusional to think otherwise.

PPS.  Why did I chose to pick on Nicola?  After all the last time Nicola crossed my consciousness was when she accepted a job at Australians Mutual Provident (AMP) and then did not come.  I am an Australian and Nicola Horlick is hardly a celebrity here.   A distant relative of mine is the chairman of the AMP - so I guess he offered her the job...

I genuinely wasn’t going to post anything.  I wrote the post with no intention of putting it up.  But then she accused her critics of being sexist – and blamed the SEC for the apparent failure to do her own homework.  That invited a response. 

And I wouldn’t have made a second post if she hadn’t changed her website.  

But as I dug I found more and more that is in the public interest.  The financial crisis in Bronte’s view will end when people learn to trust other people in financial markets – and here we had someone who had large – and potentially devastating capital calls trivialising her problems.  

This deserved a little exploration.


investmentgardener said...


I am aware that you are/were starting your own hedge fund. Could you perhaps devote a post on the apparent inherent contradiction involving hedge funds. For one everyone needs to be as open as possible about what hedge funds invest in, which safety nets are in place and how hedge fund managers achieve (hopefully above market average) returns. On the other hand hedge funds will try to protect their investment methods by all means to try and avoid copycat investors from running the same scheme.



Anonymous said...

"This deserved a little exploration."

And thank you for spending the time, it is _most_ appreciated.

One cannot but identify a pattern of incompetence in this ladie's behaviour. How such person could thrive in finance just raises questions about the whole industry.

Anonymous said...

I see the Atlantic has picked up on the Horlick story:

And Santander pulls a website mentioning due diligence:

Happy holidays!

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