For most people, the idea of “winding down” in the Cayman Islands evokes images of a relaxing Friday happy hour after a long week of work. For hedge fund and private equity fund investors, however, winding down is usually anything but relaxing and happy, particularly if legal action leads to the court becoming involved.
FTI Capital Management (Cayman) Ltd., an investment adviser registered with the United States Securities and Exchange Commission, is a wind-down focused funds manager that offers an alternative to more traditional liquidations or director-led wind downs.
Senior Managing Director Andrew Morrison said FTI Capital Management, which is a wholly owned subsidiary of Washington-based FTI Consulting, Inc. — an entity listed on the New York Stock Exchange — was established in the Cayman Islands because of its position as a world-leading jurisdiction for the registration of investment funds.
“We were seeing a lot of funds wind down here either through a liquidator or the fund’s directors and we carry out that type of work,” he said. “Sometimes that works well, but it isn’t always the right solution.”
Traditional methods of ending the life of a hedge fund can be expensive, both in terms of professional fees and lost asset value.
FTI Capital Management’s solution is to step in and replace the incumbent fund manager to lead the wind down. This approach can help avoid the perception of distress associated with liquidation, which has been known to negatively affect asset value.
“It’s also good from an investor’s perspective because FTI Capital Management adopts success-based fee structures,” he said. “What we propose is a fee structure that is aligned to the interests of the investors, with compensation based on the amount and timing of their cash returns and no large fixed management fees. That approach incentivises us and aligns our interests with those of the investors.”
REASONS FOR WINDING DOWN
Morrison said there are a number of reasons for winding down a fund, some more benign than others.
“The trigger is often a dispute between investors and the manager,” he said. “It could be due to under-performance of some kind or a breakdown in the relationship. It could also be a succession issue for the manager due to a desire to move on to new projects … and our solution could offer an elegant exit for the manager.”
Mostly, however, FTI is called in when investors want to avoid a costly dispute resolution through the courts.
“The situations we tend to get involved in are contentious and complex,” Morrison said, adding that illiquid assets are often a part of the issue. “We are a wind-down focused manager that is not motivated or distracted by raising or deploying new capital. We bring objectivity to our commercial analysis and identify the optimal realisation strategies, without being constrained by — or emotionally wedded to — prior investment decisions.”
Portfolio Manager Alastair Loxton said FTI Capital Management’s approach is to step in as manager as adroitly as possible.
“We want to keep as much of the corporate governance documents in place as possible,” he said. “We want to make the transition as easy for the investors as we can, while ensuring the governing documents are not disregarded simply because the fund is in wind down.”
Beyond offering a cost-effective alternative solution to liquidation through the courts, FTI Capital Management offers a wealth of expertise.
“We’re not just FTI Consulting in Cayman; rather we work closely with our global network of colleagues,” said Morrison, noting that the FTI Consulting group is not only also very active in fund restructuring and other financial advisory services in the Cayman Islands, but it also has 4,600 employees operating in 28 countries around the world.
“We have access to market-leading experts who understand many geographies and industries,” he said. “It’s unusual to have this kind of multi-disciplinary expertise so readily available to an investment manager out of a global consultancy firm.”
FTI Capital Management’s Grand Cayman office in Camana Bay currently has 14 employees. David Griffin, who is also a senior managing director, established FTI’s presence on Grand Cayman and has helped grow the firm to where it stands today.
“We’ve grown the team steadily over the past four years,” he said. “We have plans to add more people over the course of this year.” Griffin said Grand Cayman’s law firms and corporate guidance providers have responded positively to FTI’s new business proposition.
“We had one firm tell us, ‘If this had been available it would have worked better than the solution we eventually used.’”