H2O Asset Management has scrambled to offload hundreds of millions of euros of illiquid bonds as the asset manager battles a crisis triggered by an outsized bet on debt linked to a controversial German financier.
The Mayfair-based firm, which is a subsidiary of French bank Natixis, has suffered a €1.4bn drop in assets across six of its funds, according to data up to Thursday, after the Financial Times revealed the scale of its holdings of bonds tied to Lars Windhorst, a flamboyant entrepreneur with a history of legal troubles.
After dumping €300m of this private, non-rated debt on Friday, the sales appeared to accelerate on Monday. The asset manager, which was founded in 2010 and whose assets have ballooned to more than €30bn, announced at the end of the day that its exposure to these bonds was less €500m, having begun the day holding around €1bn.
The fund manager was plunged into crisis after FT Alphaville reported last week that H2O’s latest filings collectively listed investments in more than €1.4bn of illiquid bonds linked to Mr Windhorst. Concern over the scale of illiquid debt at H2O has hit also Natixis, whose shares dropped 15 per cent over two days last week and shaved close to €2bn off the bank’s market capitalisation. They closed up less than 1 per cent on Monday in Paris.
In an effort to staunch outflows, H2O said earlier on Monday that those clients wanting to pull money would have to accept a discount of between 3 per cent and 7 per cent on the value of their investments. This practice — known as “swing pricing” — is a way in which firms can pass on the higher trading costs at times of market turmoil to clients demanding their money. The Financial Conduct Authority last month recommended it as a way for asset managers to halt “fire sales” in times of stress. H2O first introduced this practice in 2017.
Alongside that deterrent, H2O also scrapped entry fees across its funds after having hiked “introduction fees” on five of them at the end of last year.
“We struggle to understand why the H2O funds bother at all to hold exposures to illiquid private placements, and why all of these investments have to be associated with Mr Windhorst,” analysts at research firm Autonomous noted.
H2O’s investments are in a range of companies backed by Mr Windhorst, ranging from a German property company to an Italian lingerie maker.
The decision to cut its exposure to bonds tied to Mr Windhorst contrasts with H2O’s vow last week that it was “committed to continuing to work” with him. H2O’s chief executive Bruno Crastes also defended his relationship with the German financier in a video, describing Mr Windhorst as “extremely talented”.
H2O added on Monday that the aggregate value of the illiquid bonds is now below 2 per cent of its assets under management following the sale and the lower valuations for the remaining debt.
Last week, H2O told investors that the majority of its positions related to Mr Windhorst were classed as “Level 3 securities”. This is a term for financial assets that are not traded frequently, making it difficult to find a reliable market price.
Natixis said that it supported the measures taken by H2O. In a separate move aimed at “restoring confidence” in its subsidiary, the French bank said it had brought forward a “periodic audit” of the firm, which it began on Friday. H2O also told investors that it would appoint an “independent auditor” to “reassure investors on the investment process and valuation policy” on its non-rated private bonds.
Morningstar, whose assessments are used as a key guide for investors, suspended its rating of an H2O fund the day after the FT’s report, citing liquidity concerns.
Natixis’s asset management chief last week described H2O’s range of holdings as “quite diversified”, adding that the portfolio included “even a luxury goods company in Italy”, in reference to La Perla — the Italian lingerie maker Mr Windhorst purchased in 2018 after settling a legal dispute with its previous owner, Italian entrepreneur Silvio Scaglia.
Separately, the head of one of the companies H2O backed announced plans to step down on Monday. ADS Securities confirmed its chief Philippe Ghanem is leaving the Middle Eastern brokerage, but that the decision was unrelated to the crisis at H2O.
“At the start of the year, Philippe expressed his desire to leave the organisation and pursue the development of a new entrepreneurial project,” a spokesperson for ADS said. H2O last week listed an investment in the bonds of ADS Securities as one of nine positions related to Lars Windhorst, describing the company as an “Abu Dhabi-based financial services company”.