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A capital idea for GSC Partners

A big concern for the mushrooming ranks of hedge funds and other alternative-investment partnerships these days is how to monetize the stakes of the founding partners and grow into institutions that will last over generations.

A big concern for the mushrooming ranks of hedge funds and other alternative-investment partnerships these days is how to monetize the stakes of the founding partners and grow into institutions that will last over generations. Some, such as Highbridge Capital Management and Ospraie Management, have sold all or part of themselves to bigger financial institutions. But a novel deal struck last month may present an alternative to selling out.

GSC Partners, a $9.2 billion manager of structured-credit portfolios and hedge funds, based in Florham Park, New Jersey, hired UBS Securities to syndicate a $140 million senior secured bank loan. GSC will use the proceeds to redeem preferred partnership interests -- essentially, GSC's founding partners' stakes in the firm -- and pay off existing debt. The recapitalization will broaden ownership of GSC from nine partners to 135 employees, enabling it to retain and recruit talent. Best of all, the firm won't surrender control to a third party.

"It's an incredibly efficient way of restructuring," says Fred Eckert, a former Goldman Sachs private equity executive who co-founded GSC in 1994. "This gives us currency to buy smaller businesses and, maybe down the road, go public."

The deal also brings risks. GSC's debt will rise to more than five times its annual earnings before interest, tax, depreciation and amortization -- well outside the range that is typical for asset managers, according to Moody's Investors Service, which has given the loan a junk rating of B1.

But Eckert, 57, isn't fazed. He notes that GSC's portfolios have long lockup periods, typically in excess of five years, so fee income is consistent and the firm is not at the mercy of investors pulling money if short-term performance sputters. Moreover, he says, GSC has a diverse array of investments, including distressed debt, real estate and structured finance, making its cash flow less susceptible to market ructions.

But there's another potential downside: Competitors can buy a piece of the loan and gain access to GSC's heretofore undisclosed financial statements. Eckert sloughs off this concern as well. "The model of the future is more disclosure," he says. "It does not give our competitors an advantage to know we're profitable."