Update on TXU Corporation LBO

In 2007, a group of private equity firms and investment banks bought TXU Corporation for $45 billion in the largest leveraged buyout transaction.  The company changed its name to Energy Future Holdings Corporation but the fact remains that it is in trouble.  This is due to lower gas prices (the U.S. fracking expansion) and demand (from the recession and jobless recovery).  Two years ago, the debt associated to the deal was trading at a discount.  As of March 31, 2013, KKR has thrown in the towel and is valuing the bonds at 0.05 of cost.

On April 15, the company proposed to re-structure its $32 billion in debt.  Equity owners would be wiped out and the senior debt owners and the original private equity consortium would split the company 85%/15%.  Already, distressed debt managers Franklin Templeton Investments, Apollo Global Management LLC, Centerbridge Partners and Third Point LLC are buying debt which would be converted to equity stakes in case of re-structuring or bankruptcy proceedings.

A few institutional investors were unlucky enough to have negotiated terms to invest directly in the buyout.  Others were only invested in the private equity funds leading the deal.  Some of them are the biggest pensions such as California State Teachers' Retirement System, California Public Employees' Retirement System, Washington State Investment Board, Oregon Public Employees' Retirement Fund, New Jersey Division of Investment and Pennsylvania State Employees' Retirement System.  According to TorreyCove Capital Partners LLC of La Jolla, California, KKR 2006, the fund with the TXU deal, will still have a higher return than the S&P 500 in 2012.  KKR 2006 returned 7.09% versus 3.25% for the index.  The privileged co-investors included California State Teachers' Retirement System and Government of Singapore Investment Corporation.  There is no word if either managed to offload their direct investments through the secondary market.

In another twist, some fund managers think that Energy Future Holdings could extend its debt into the future. Since 2009, the company has re-financed $25.7 billion of its debt.

The source for this article can be accessed here.

Gold: Is the Bubble Popping?

On Friday, May 17th, gold futures dropped to $1,358.30 per ounce;  retracing its steps from a high of $1,920 per ounce in September 2011.  Year to date, it has dropped about 18% on the COMEX in New York.  Money managers such as BlackRock, Northern Trust, Farallon Capital Management, Whitebox Advisers and Soros Fund Management have reduced or hedged against gold as represented by the exchange traded product:  SPDR Gold Trust.

BlackRock and Northern Trust sold more than 50% of their holdings and Soros Fund Management sold 12% as of March 31, 2013.  This follows a quarter where Soros Fund Management sold 55% of their gold position.  Whitebox Advisors sold 90% of their smaller position.  Farallon Capital Management used put options on the SPDR Gold Trust as their negative view.

On a high level, the number of short futures and options contracts on gold is growing.  According to EPFR Global of Cambridge, Massachusetts, $21.1 billion in gold and gold-related funds have been sold by investors.

On the other hand, Paulson & Company, Schroder Investment Management Group and Elliott Management have held onto or bought SPDR Gold Trust.  They are looking at increased demand from India and China as a catalyst for a recovery in the asset.

The source for this article can be accessed here.

Hedge Funds Want Retail Investors

The number of hedge fund mutual funds or liquid alternative funds has increased from 343 at year end 2007 to 838 at year end 2012.  Assets under management are $90.3 billion, an increase of 14% over the same timeframe.  Neil Siegel, Managing Director and head of global marketing and product development at Neuberger Berman, and Evan Mizrachy, head of retail alternatives at BlackRock Alternative Investments, believe that retail investors and their 401(K) and IRA accounts are under-served by and under-allocated to alternatives.  Expanding into this segment would diversity hedge funds' client base.  On the other hand, retail investors demand daily liquidity requirements which would limit their investment universe and, maybe, performance.

According to Morningstar, the strategies run by these funds are led by long/short ($25.8 billion), market neutral ($19.5 billion), multi alternative ($17.5 billion), currency ($11.7 billion), managed futures ($8.5 billion),  short ($6.8 billion) and trading ($449 million).  Of course, these assets under management are clearly miniscule when compared to the $13.1 trillion in US mutual funds according to the Investment Company Institute.

The oldest fund, Merger Fund, has been around for 23 years using merger arbitrage strategy to give investors assets with low correlation to stock markets and volatility.  Two major institutions, FMR and Blackstone have also moved into this space.  FMR, parent company of Fidelity Management, uses Arden Asset Management to manage their alternative vehicles while Blackstone Alternative Asset Management is building their business organically.  The largest manager by far is PIMCO but their investors are mainly institutional.

The source for this article can be found at Pensions & Investments.

Dark Trading Pools

In the April 2013 issue of ai-CIO, there is an article about the growth of dark trading pools.  These are private exchanges where investors trade anonymously.  Their nicknames include non-displayed markets, private markets, off-exchange trading or upstairs trading.  In 2008, they made up 6.5% of the total trading volume in US Equities.  In 2012, they have grown to take up more than 13%.

The main advantage of the dark pools is privacy.  An institutional investor getting into or out of a large position would not move the stock price much.  On the exchanges, a large order would be noticed and the price would move against the investor.  To hide their order, it would have to be split into many smaller orders by a sell-side salestrader.  Dark pools are not foolproof.  The stocks are usually limited to those with the highest trading volumes.  The operator of the dark pool could use the information to trade ahead of the investor or sell it to another trader.

Since 2007, investment banks have created dark pools such as Credit Suisse's Crossfinder and Goldman Sachs' Sigma X.  To generate additional revenue, they have given access to algorithmic traders in the quest to find discrepancies in security prices among exchanges.  If dark pool trading volume in more numerous trading venues grows, then the prices on public exchanges may no longer be accurate.  More pools means that investors would have search harder to find the other side of the trade.  It seems that the solution for one issue has created others.