A convertible bond, backed by a fund of hedge funds and offering investors daily redemption options at net asset value will hit the Eurobond market at the end of the month, says Lars Jaeger, partner with Partners Group. Partners, a Swiss hedge fund asset manager, has structured the securitization and Merrill Lynch will underwrite the offering, he says. The notes will consist of one E200-300 million tranche offered to European institutional investors. Partners plans on offering U.S. dollar-denominated tranches at a later stage. The notes have a 10-year maturity, offer a 1% coupon and are capital-protected by Société Générale. In addition, the deal may be rated AA- by Standard & Poor's, says Jaeger. Bill Berry, the Merrill Lynch banker in charge of underwriting, did not return calls.
Jaeger says that what is new with this deal is that investors may redeem their holdings daily at NAV. The bonds were created with this new liquidity feature to address illiquidity and lack of transparency concerns that hedge fund investors typically have, he says. At maturity, the investors will have the option to redeem the notes or to invest at NAV into the equity of the underlying hedge fund portfolio. The notes are wrapped, meaning that even if principal is below par value at maturity, the investors are guaranteed par.
In addition, there is a new transparency feature, which Jaeger says is the first of its kind, that allows investors to get a daily report on the aggregated portfolio exposure and risk of the underlying 15-20 hedge funds. Jaeger will not yet disclose the names of the underlying hedge funds but says it is a mix of 80% U.S.-based hedge funds and 20% European-based.
Partners is a veteran in the field of alternative investments securitization, known for pioneering the first collateralized debt obligation backed by private equity in a deal called Princess.