Daniel Zwirn, the New York investor forced to shut a $4 billion hedge fund because of client withdrawals, is starting over with a new publicly traded fund that will be safe from redemptions.
Zwirn will help manage a closed-end fund for Alda Capital Corp. that will lend to small and medium-sized companies, the Chicago-based firm disclosed in a regulatory filing this month with the Securities and Exchange Commission. Alda plans to raise about $50 million for the fund, according to the filing.
Zwirn produced 49 consecutive months of positive returns by making similar loans from his hedge fund, only to get caught short of cash when investors pulled money in 2007 following a delay in the release of a financial audit. With banks having slashed lending to middle-market companies, money managers like Zwirn are rushing to fill the void by setting up funds known as business development companies, or BDCs, to provide debt financing, particularly in conjunction with takeovers.
“This is an advantageous way to pick up certain illiquid assets and manage them,” said Peter Shea, a fund lawyer in the New York office of Katten Muchin Rosenman LLP. “There has been an enormous uptick in BDC transactions.”
Zwirn didn’t return telephone calls seeking comment. The 39-year-old investor founded D.B. Zwirn & Co. in 2001, following stints at Highbridge Capital Management LLC and Michael Dell’s MSD Capital LP, both based in New York. He eventually managed about $12 billion in assets.
The flagship D.B. Zwirn Special Opportunities Fund closed in February 2008 after investors asked to withdraw more than $2 billion. The fund had told clients in early 2007 that an internal investigation had found improper financial transfers and accounting of expenses. It took until December 2007 for an independent auditor, PricewaterhouseCoopers LLP, to report that Zwirn’s financial statements conformed to generally accepted auditing standards.
D.B. Zwirn has said it was the victim of misconduct by a former employee, and that an investigation showed the company’s actions were above reproach.
Fortress Investment Group LLC, a New York-based money manager, agreed in April 2009 to handle the liquidation of the $4 billion fund, whose assets included private-equity investments and loans to companies that had trouble obtaining financing elsewhere. Clients were repaid with interest on any money they were owed because of the audit.
The SEC last month filed a complaint against Perry Gruss, D.B. Zwirn’s former chief financial officer, alleging that he authorized $870 million in improper transfers between the Special Opportunities Fund’s onshore and offshore accounts without informing Zwirn or any of the firm’s other partners.
Nathaniel Akerman, an attorney representing Gruss, said in a statement issued at the time that the SEC’s allegations were “completely without merit.” Akerman, who works in the New York office of Dorsey & Whitney LLP, filed a motion May 16 seeking dismissal of the SEC complaint.
Zwirn tried to start a new hedge fund in April 2008 called ZLC Global Investments that would use the same investment strategy as his Special Opportunities Fund, people familiar with the situation said at the time. There are no records at the SEC or the Delaware Department of Corporations showing that ZLC Global was incorporated or raised any money.
In its May 9 filing with the SEC, Alda said access to capital by “hedge funds and other opportunistic leverage providers” has dwindled in recent years, “reducing their ability to provide capital to small and medium-sized companies.”
Syndicated loans to middle-market companies, defined as those with earnings of $50 million or less before interest, taxes, depreciation and amortization, totaled $34.8 billion in 2006 and $34.2 billion in 2007, according to Standard & Poor’s Leveraged Commentary & Data. Following the crisis, those totals dropped to $5.3 billion in 2009 and $11.7 billion in 2010, S&P figures show.
Alan Gordon, chairman and chief executive officer of Alda Capital Manager LLC, the fund’s investment adviser, didn’t return telephone calls seeking comment. He is also the chairman and chief executive officer of Chicago-based Richland, Gordon & Co., a private-equity firm founded in 1947.
Gordon and Zwirn are the co-managers of Alda Capital LLC, a private-equity investment firm formed last year, according to the SEC filing. In turn, Gordon and a member of Zwirn’s family hold a stake through the private-equity firm in Alda Capital Manager LLC, the loan fund’s investment adviser.
Gordon and Zwirn, along with executive Lori Wittman, will serve on an investment committee that initially screens and then gives final approval to each investment opportunity that the advisory firm’s staff identifies for the fund. Zwirn is not an employee, officer or director of the Alda fund itself, according to his spokesman.
As a business development company, Alda can borrow as much as 50 cents for each dollar of capital, compared with a limit of 33 cents for standard closed-end funds. BDCs generally must invest at least 70 percent of their portfolios in securities or loans from U.S. companies that are privately held or have market capitalizations of $250 million or less, said Eric Purple, an attorney in the Washington office of K&L Gates, who specializes in investment funds.
Closed-end funds, such as BDCs, issue a fixed number of shares that trade on stock exchanges, meaning that investors who want to cash out can simply sell their holdings in the open market. Mutual funds, by comparison, allow redemptions daily and hedge funds usually do so quarterly, raising the possibility that managers will have to sell assets should a number of investors seek to cash out simultaneously.
“Really what the BDC was designed for was to get capital into smaller private U.S. companies,” said Troy Ward, an analyst who follows the industry for Stifel, Nicolaus & Co. in St. Louis.
Ward said the annual interest rates on loans to such businesses are generally between 10.5 percent and 11 percent. “There is definitely margin to be made in lending in the middle market, and it’s attracting more and more capital,” he said.
Steven Klinsky, chief executive officer of New Mountain Capital LLC, a New York-based buyout firm, filed in February to raise $200 million for a BDC that will invest in the debt of companies with annual earnings of $20 million to $200 million. Mark Attanasio, the owner of the Milwaukee Brewers baseball team and a co-founder of Crescent Capital Group LLC, filed in March to create a similar fund.
Oaktree Capital Management LP, in a May 11 filing to raise $125 million for a BDC that will make direct loans to companies, cited data from research firm Preqin Ltd. that U.S.-focused buyout firms are sitting on about $535 billion of “dry powder,” or uninvested capital. The private-equity firms will need debt financing to supplement their capital for leveraged buyouts, according to the Los Angeles-based firm’s filing.
“It’s anticipated that there is going to be quite a lot of appetite, and some of the traditional sources like banks are not as active as they were,” said Richard Prins, an attorney in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP who is working on BDC stock offerings, including Oaktree’s.