Cayman Islands: Walkers Sees Rise in Hedge Fund Financing for Distressed Funds
Last Updated: 18 May 2006

High-Risk, High-Return Opportunities Attract Investors

George Town, Grand Cayman – (May 17, 2006) – Walkers, the global offshore law firm of choice for investment banks, international law firms, collateral managers, and other financial institutions, said today that the trend of hedge funds investing in distressed funds that are in liquidation has grown significantly over the past two years, due in large part to the simultaneous increase in the capital managed by hedge funds and the number of distressed opportunities.

Prior to this investment boom, there were few options for distressed funds. Traditional banks are loath to lend money to fund liquidations. Banks generally only lend when there is an assurance that the borrower can repay the loan. Hedge funds, however, are willing to finance such liquidations because of the potential for high returns. Typically, a hedge fund will buy out as much of the original investment in a distressed fund as it can, with the intention of becoming the sole, or at least the largest, investor. With this controlling influence they are then prepared to assist by way of priority liquidation funding for litigation against wrongdoers or to recover other assets. Whatever funds are recovered in the process are then distributed to all the investors, including the investing hedge fund, which also receives back its loan in priority to all other claims. If the strategy works it can be a very lucrative one.

"We’ve witnessed a sizeable upswing in this trend over the past two years," Sandie Corbett, a litigation partner at Walkers in the insolvency and restructuring group, said. "With so much money and fewer traditional investment opportunities, hedge funds readily accept these types of unconventional high-risk, high-payoff ventures."

This trend has seen high interest coming from funds based in the New York and London markets. Companies that have benefited from hedge fund intervention include Foamex International, Inc.; Krispy Kreme; and even Enron Corporation whose international assets are due to be purchased by a group of private equity and hedge fund managers. According to Standard & Poor, hedge funds accounted for 12 percent of all loans allocated to institutional investors in 2005, as compared to less than one percent in 2001.

"Financing liquidations were formerly the domain of private equity funds," Kevin O'Connor, a partner in the investment funds group at Walkers, said. "As private equity funds and hedge funds continue to converge, we see an increase in hedge fund involvement in distressed funds liquidation. In order to accommodate this trend, Walkers is expanding its expertise in this niche."

Mrs. Corbett, who was named as a leading insolvency counsel by Chambers & Partners, was recently promoted within the Litigation Department, in part to handle the rise in this type of work. Indicative of Walkers expansion, Mrs. Corbett's promotion was preceded by Mr. Philip Millward's promotion to partner in January 2006. A member of the Walkers investment funds group, Mr. Millward is listed as a leading private funds lawyer in 2003 and 2004 by Who’s Who Legal.

About Walkers and Walkers SPV

Based in the Cayman Islands with offices in the British Virgin Islands, Dubai, Hong Kong, and London, Walkers offers high-level skills across the legal spectrum. Named by HedgeWorld Limited as the top law firm for hedge funds by total assets of funds and assets of non-U.S. funds, we act for a wide range of clients including major financial institutions, investment banks, leading law and accounting firms, major corporations of all kinds, partnerships, trust companies and other fiduciaries representing almost every country in the world. Our aim is to provide clear, concise and practical advice based on an in-depth knowledge of the legal, regulatory and commercial environment in the Cayman Islands and the BVI. We are experienced in all types of international and cross-border transactions and we welcome a close working relationship with our clients and their other professional advisers.

Walkers SPV Limited is a licensed trust company and mutual fund administrator, wholly-owned by Walkers, with a branch office in Tokyo. It provides experienced and expert management and administration of Special Purpose Vehicles (SPVs), Directorship and Trustee services to Cayman domiciled investment funds as well as registered office and secretarial services for many companies and partnerships of all types. 

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