JOHANNESBURG – Westbrooke Capital Management’s Special Opportunities Fund aims to grow its assets under management from R152 million to up to R1 billion within five years.
Jarred Winer, co-founder of Westbrooke Capital Management, says with the current assets under management, its event-driven hedge fund can’t take full advantage of the opportunities in the locally listed small and mid-cap space where it operates.
“So I think it will just widen our universe.”
Winer adds that it wants to grow strategically without diluting returns for its existing investors, which include wealth management firms, funds of funds, the founders and high net worth individuals. The fund requires a minimum investment of R2 million which is locked in for one year.
Launched in June 2012, the fund targets an average compounded net return of 25% per annum over a rolling three-year investment horizon. In the 2013 calendar year it delivered a net return of 25%.
Background
Winer started Westbrooke Capital Management in 2012 together with alternative asset manager Capricorn who specialises in hedge funds and private equity and investment holding company Westbrooke who operates in the small to mid-cap private equity market.
The parties saw an opportunity in the small and mid-cap market at the time.
Winer says prior to 2008 a lot of large institutions invested in the small and mid-cap space, but exited after the market crashed. Investment banks closed their proprietary investment desks and have tended to focus on larger transactions.
A number of other hedge funds have grown too large to focus on this segment of the market.
Winer believes the sector is undercovered and companies are often misunderstood by the market although it presents unique investment opportunities with attractive risk adjusted returns.
The parties believed they could utilise their networks, investment banking, private equity and industry experience to play an active role to enhance the value of portfolio companies and profit from event-driven special opportunities in the small and mid-cap listed market.
This approach results in a major portion of the fund returns being driven by corporate events and returns with a low correlation to market indices such as the Alsi.
Its major returns thus far have been from “special opportunities” – playing an active role to unlock value and major corporate events, which are not correlated to broader market movements.
Big events
Winer explains the fund delivered a return of 9% in December last year on the back of a bid for JSE-listed automotive manufacturer Control Instruments in which it owned a 20% stake.
It introduced two bidders to Control Instruments, determined the price of the bid, the terms and introduced the bidders to management.
The fund also had a return of 6% in October following a shareholder and board restructuring exercise at electronics group Amalgamated Electronics Corporation (Amecor). The Special Opportunities Fund is the largest shareholder in Amecor.
Winer says the returns in these two months were the result of actual events and not of broader market movements.
“So the returns profile of the fund has been quite different to other hedge funds. It has got a low correlation to the market.”
Asset allocation
The Special Opportunities Fund invests approximately 60% of its assets in an “activist portfolio of special opportunities” within the local small and mid-cap listed equity market. These companies generally have a market capitalisation of R1 billion or less.
Winer says with these opportunities the fund takes a significant stake in the company and plays an active role to enhance value. This was the case with Control Instruments as well as Amecor.
In such instances the fund can identify opportunities and improvements, provide equity capital and assist with debt capital raising to fund growth, restructure balance sheets, assist with mergers and acquisitions, delistings, disposals, management incentivisation and alignment with shareholders.
The remaining 40% is invested in a more liquid portfolio of larger small and mid-cap listed companies, which generally have a market cap of between
R1 billion and R6 billion.
In this portion of the portfolio the fund looks to profit from investing in undervalued or misunderstood companies, turnarounds, company transformations, balance sheet restructurings, merger and acquisition arbitrage, simulated leveraged buyouts and liquidity events. The fund also utilises shorts in this portion of the portfolio to hedge market risk and profit from companies that they believe are overvalued by the market. Some of its investments in this portfolio to date have included Spur, Kagiso Media, Illiad and Sasfin.
Winer says the fund’s mandate requires that at least 25% of its assets should be invested in assets that it can exit within 90 days, which is different from the 60% invested in special opportunities, which are longer-term investments.
Overall, the fund aims to have a highly concentrated portfolio. In the long run it would prefer to hold 10 stocks or less in the portfolio “because we like to do a lot of work on fewer companies”.
While the event-driven and special opportunities asset class has attracted billions in the US and Europe, it is still a fairly new and small market in South Africa. Winer says while there is opportunities in the space locally, the sector will probably remain in the boutique space.