H2O Freezes Funds as French Watchdog Scrutinizes Windhorst Deal

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H2O Asset Management has frozen several of its funds after the French financial regulator raised concerns about the valuation of illiquid assets being sold to an investment vehicle owned by German financier Lars Windhorst.

France’s AMF flagged “valuation uncertainties” because of the significant exposure of three H2O’s funds to “private securities,” leading the asset manager to suspend those funds and five others. That followed an agreement to sell all of the holdings to Evergreen Funding, a new company owned by Windhorst’s trust.

Windhorst, who sold the assets to H2O in the first place, has secured financing from two high-profile investors to buy them back at discounted prices, Bloomberg News reported on Friday. Windhorst tapped German fashion retail magnate Friedrich Knapp and health care entrepreneur Ulrich Marseille for about 500 million euros ($595 million) in funding to help him repurchase the assets.

The intervention from the French watchdog is the latest twist in a saga that began more than a year ago, after revelations about the funds’ exposure to investments linked to Windhorst. Research firm Morningstar Inc. subsequently expressed concerns about H2O holding rarely traded securities in funds that allowed investors to make daily withdrawals. The potential for a liquidity crunch triggered about 8 billion euros of fund outflows.

Side Pockets

The suspension will be in place for four weeks, during which time H2O will create what’s known as “side pockets” to house the private securities, the firm said. The open-end funds that are frozen include the Allegro, MultiBonds, MultiStrategies and Adagio strategies, according to a statement from H2O.

Windhorst declined to comment. A representative for the French regulator said AMF had nothing more to add beyond Friday’s statement.

H2O’s fund investments included debt and stock issued by companies tied to Windhorst, such as Italian lingerie brand La Perla and oil explorer Trent Petroleum. Many of the assets suffered a battering as the coronavirus pandemic took hold in March, with bets on oil and Italian bonds suffering some of the steepest losses.

In May, H2O agreed to sell the illiquid securities back to Windhorst, allowing it to unwind positions that had prompted concerns about its risk controls. The transaction is taking place in several tranches and will be completed late September, according to a person familiar with the matter.

Knapp and Marseille took up about 40% of a 1.25 billion euro high-yield bond issued by Evergreen to buy back the portfolio, according to people familiar with the matter and a presentation seen by Bloomberg News. Knapp, Marseille and a third unidentified investor bought about half of the notes, people said.

Windhorst himself invested about 400 million euros in his own bonds and a few outside investors took the rest, the people added. The German financier has recently held talks with other potential investors about taking part in the raise, some of the people said.

Evergreen in June issued a 1.25 billion euro one-year bond paying a yield of 12.5%, designed to buy back securities with a nominal value of over 2 billion euros at a 50% discount, Bloomberg News reported Friday. The deal would yield a profit of more than 1 billion euros for Windhorst’s Evergreen, the people said.

Read more: Natixis’ H2O Agrees to Sell Stocks, Bonds to Windhorst’s Vehicle

Knapp, 67, owns German fashion retail chain New Yorker which boasts more than 1,100 stores and 18,000 employees. Marseille made a fortune in sanatoriums, rehab and other specialized clinics.

H2O, which manages more than $25 billion in assets, is led by Bruno Crastes and Vincent Chailley. The investment firm is one of the top money makers for Natixis’s asset management arm.

“Natixis supports these measures, which are aimed at protecting investors’ interests,” Natixis said in a separate statement following the funds’ suspension. “The suspension of these funds has no financial impact on Natixis, either on the balance sheet or on the income statement.”

— With assistance by Chris Bourke, and Ania Nussbaum

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