Vol 12 (2015) - Issue 4

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Fund Crisis and Change Management: A Fresh Approach

Since the 2008 global financial crisis, some directors and managers of financial services companies, hedge funds and investment vehicles, have struggled to address the fall-out from the recession, and may still be facing financial uncertainties. Traditional solutions, such as voluntary and compulsory liquidations, have historically been employed to deal with structural or financial difficulties with varying degrees of success.
Further, fund managers may at times find themselves faced with the question of what to do when an offshore fund has run its course, the strategy and objectives have shifted, or its economics are no longer consistent with investment objectives.
It can be tempting to ignore warning signs or put off making changes that are needed. However, ignoring the problem will rarely, if ever, result in maximising value for investors, and may even cause problems in healthy parts of the business if left unchecked for too long. So what options could fund management consider in these circumstances?

Traditional liquidation solutions – not fit for purpose
The liquidation process is a formal one, which does not necessarily address situations where changes are needed. As a liquidator’s role is laid down in law or directed pursuant to a court order, there is little flexibility in what steps they can take and what potential solutions can be explored, as well as adding additional layers of cost. Sometimes the burden of conducting the statutory requirements of a liquidation can far exceed the benefit achieved from the work done to address the problem. As a result, the liquidation process is often ill-suited to address the unique challenges facing funds.
Investment managers and office holders may also be concerned about loss of control in a liquidation scenario. These stakeholders, who are more familiar with the fund, its investments and affairs, may find themselves and their knowledge pushed out of the process, while costs pile up and they see investments sold at significant discounts. This results in strained relationships between the stakeholders and liquidators and a loss of operational knowledge in winding up the company’s affairs.
In addition, because the liquidation process is a formal open process, the entity’s professional service providers can face stigma through association, albeit unfairly, creating reputational and credibility issues for years to come, particularly where parts of a business will continue to operate long after a specific piece or segment of the fund operation is wound-down.
However, there is an alternative solution for fund entities, which is internal to the company and with none of the stigma or reputational risks associated with liquidations.

An in-house solution – Chief Transition Officer
A successful transition from an under-performing or distressed entity to one that is performing, or one where a specific problem has been addressed, usually requires management to drive operational as well as financial restructuring. However, management teams may be time constrained, particularly in a distressed situation, and not have the skills readily available within their organisation to implement a restructuring or transition plan.
Where management are lacking these skills, the appointment of a specialist onto the Board as a Chief Transition Officer ('CTO'), or Chief Restructuring Officer ('CRO'), can provide additional experience and flexibility to the management team, while allowing management to focus on running the business. Such a professional will generally have direct relevant experience of dealing with portfolios holding distressed or illiquid assets and can develop creative approaches and solutions where a standard tool kit just does not fit. Fund managers will generally not possess the same skills and expertise as a restructuring professional, therefore they may inadvertently not identify or have the skills to implement the most effective plan without expert guidance.
The most practical and effective way to restructure or wind-down a fund is to leverage the knowledge and experience of the professionals who have been working with the fund historically, under the guidance of an experienced professional in the field of restructuring and distressed assets, who has alternative but complimentary skills to those of fund management.