Paulson Pledges Personal Holdings to Back Firm After Assets Fall

John Paulson Puts His Money Where His Mouth Is
  • Billionaire puts up his hedge-fund interests for credit line
  • Paulson & Co.'s capital is down by about half from its peak

John Paulson, the hedge fund manager struggling with uneven returns since his windfall wager against U.S. housing in 2007, is turning to his own fortune to help backstop his firm.

The billionaire pledged his personal investments in four of his firm’s hedge funds as additional collateral for a credit line Paulson & Co. has had with HSBC Bank USA for at least five years, according to a filing last month with the state of New York. The holdings will also serve as guarantee for a new personal line of credit for Paulson.

John Paulson
John Paulson
Photographer: Jin Lee/Bloomberg

Paulson is using his wealth to back the firm’s borrowings after investment losses and client defections cut assets by more than half from their peak. The decline is eroding the fees Paulson & Co. pledge as collateral for the original credit line, and on which the firm relies to pay expenses and compensate employees.

“If the company’s financials don’t support the credit line, you get somebody like that to provide a credit enhancement,” said Thomas Leslie, an attorney at Greenberg Traurig LLP who has represented issuers of loans secured by hedge fund interests.

Routine Expenses

Money managers sometimes establish revolving credit lines to meet routine expenses, just as a manufacturer or retailer might arrange financing to pay for inventory and meet other working-capital needs. Armel Leslie, a member of Peppercomm Inc. who serves as a spokesman for New York-based Paulson, said the firm has had a credit line for at least the last five years to handle short-term cash flow.

Filings show Paulson & Co. secured its December 2010 credit line with annual management fees from five of its hedge funds, a common form of collateral in the industry. The firm’s funds charge outside clients a standard annual management fee equaling 1 percent to 2 percent of assets and a performance fee totaling 20 percent of profits, according to its latest investment-adviser registration.

The collateral may be down in value since Paulson & Co. entered into the agreement. The firm’s assets under management, which generate the fees, have fallen about 50 percent to $18 billion since Paulson & Co. received the credit line. Of the money that remains, more than half belongs to Paulson and other insiders at the firm who have been exempt from paying fees.

Retaining Talent

Leslie declined to comment further on the December filing, as did Robert Sherman, an HSBC spokesman. The filing didn’t show why Paulson’s fund stakes are being used as collateral for the company’s borrowing agreement, or what he plans to do with his personal line of credit.

Other hedge fund leaders have tapped their wealth to back their firms and retain top talent during slumps, said Jeff Levi, a partner at Casey Quirk. Levi, whose Darien, Connecticut-based firm acts as a management consultant to fund advisers, said he was speaking in general without knowledge of Paulson’s plans.

“In past market dips, some of the founders did dig into their own pockets to pay bonuses,” Levi said. “You run the risk of losing key people if you don’t provide a market level of compensation.” 

Subprime Wager

Paulson shot to fame and made a profit of $15 billion nine years ago when the subprime mortgage market collapsed, setting off the global financial crisis. The firm’s net assets under management peaked at $38 billion in early 2011, before clients started pulling out amid losses.

As of the end 2014, about 57 percent of the firm’s capital belonged to Paulson and others who don’t pay management and performance fees, according to a filing. More recent information couldn’t be obtained.

Paulson has an estimated net worth of $9.2 billion, according to the Bloomberg Billionaires Index, though it’s mostly tied up in his funds. He obtained the credit line by pledging his stakes in Paulson Partners Enhanced LP, Paulson Advantage II LP, Paulson Advantage Plus II LP, and Paulson Credit Opportunities IV LP.

Performance Fees

Other wealthy managers who have borrowed against stakes in their own funds include George Soros, whose lender is also HSBC, and Blackstone Group LP co-founder Stephen Schwarzman. Their collateral wasn’t being used to back their firms, filings show.

Paulson’s investment returns have been volatile in recent years, depressing the performance fees that can help fund employee bonuses. The firm endured its second-worst showing ever in 2014, including a 36 percent decline at Paulson Advantage, a strategy tied to corporate events such as bankruptcies and spinoffs.

Paulson’s merger-arbitrage strategy, a bright spot in performance, struggled last year. One share class of Schroder GAIA Paulson Merger Arbitrage, a Luxembourg version of the fund Paulson runs, fell 4.3 percent, according to a marketing document obtained by Bloomberg.

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