Hedge Fund QVT Financial: UK Activist Portfolio ~ market folly

Friday, January 22, 2010

Hedge Fund QVT Financial: UK Activist Portfolio

QVT was founded in 2004 by former Deutsche Bank proprietary trader, Dan Gold. QVT's approach in the UK market is to seek out activist positions in small-cap companies, particularly in the investment management sector. They appear to look for out of favor and often illiquid stocks, many of whom trade on London's less regulated AIM market. Several of their positions are in investment trust companies. See our earlier article on UK investment trusts and the potential for hedge fund activism as well as our primer on tracking a hedge fund's UK positions.

QVT have 26 holdings in UK listed companies worth approx £190,300,000. Over 90% of their holdings by market value are in investment managers of one type or another. Real estate investment managers and equity investment managers account for 40% each with non-equity investments like funds of hedge funds and alternative energy accounting for 10%.

We were surprised to discover that QVT had such high exposure to property companies (40% of their current UK portfolio). London's AIM market was the favored place to raise money for property companies from all around the world during the property boom. In this period, one hundred and sixty property companies were listed on AIM to invest in real estate in over forty different countries. Of course today the market valuations of these companies are generally only a fraction of what they were at flotation, let alone at the top of the market in 2008. All the property companies in QVT's portfolio invest outside of the UK. At first sight, this may appear to indicate that QVT are nervous about the UK property market or at least that they perceive better value elsewhere, however, it may just reflect the fact that most of the property companies that listed on AIM are focused on overseas property.

It's probably safe to assume that most of QVT's UK positions are activist to one degree or another. Information about QVT's motives and strategy towards companies is patchy but some is available via the London Stock Exchange Regulatory News Service and the financial press. Trikona Trinity Capital, an Indian property company, is one of QVT's largest positions. QVT wants Trikona to sell all its investments and return the money to shareholders. A fairly straight-forward request, but one that is potentially the kiss of death for Trikona. Trikona have responded by arguing that they would likely face legal action from their partners and the Indian government if they were to sell assets on a large scale. However, they have indicated that they will return some assets to shareholders over the next two years.

Treveria, the German real estate company, is one of QVT's newest holdings. In November, QVT called an Extraordinary General Meeting (EGM) of shareholders in an attempt to remove four directors, including the Chairman and appoint one of its own representatives. Treveria responded by pre-empting the EGM by naming Yossi Raucher as non-executive chairman replacing Christopher Lovell, the interim chairman, who remains a director. Treveria has also appointed Jeffrey Strong, a senior investment professional at QVT Financial, as a non-executive director. Following the appointments, QVT and Treveria have agreed to cancel the EGM.

QVT own 20% of South African Property Opportunities (AIM: SAPO), an AIM listed property investment company. Here QVT are in partnership with another activist Principle Capital which is run by Brian Myerson. Principle Capital is also the investment manager of SAPO via a company called Proteus Property Partners. With the support of QVT, Principle has threatened legal action unless SAPO pays out a disputed performance fee to Proteus. So far, SAPO have refused to pay. It will be interesting to see what happens as Proteus is set to have its management contract terminated in October 2010 in the wake of strategic review to help address a wide discount to net asset value.

Finally, readers may find it useful to know that some of the holdings in QVT's portfolio are also held by other hedge funds. Seth Klarman's Baupost Group and London based multi-strategy hedge fund GLG have a stake in ACP Capital (APL). Weiss Capital Management, an activist fund, has positions in CAD, CEB, and DIVA. Trafalgar, the London based long/short fund also has a position in CEB. Stephen Mandel's Lone Pine has a large 39% stake in Ishaan (ISH), the Indian property development company. See our latest article on Lone Pine's UK holdings here.

Below you'll find summaries of QVT's various positions in UK markets:

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That sums up QVT's positions and just yesterday we also covered Louis Bacon & Moore Capital's updated UK positions. Head to our coverage on other hedge fund UK positions as well.

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