Woodhull Capital Readies Credit Fund

Nov 12 2010 | 1:29pm ET

Sam Adams of Woodhull Capital Advisors says investors have told him what they want and the  Woodhull Credit Opportunities Fund is an attempt to give it to them.

The hedge fund, which is slated to launch Jan. 1, will make secured loans to small and medium-sized businesses. It was inspired by Adams' interest in companies in this size category.

“I have a background in financing smaller enterprises and in secured transactions...from my life as a lawyer, but I also worked on Capital Hill for a congressman who represented a district that had a lot of small businesses, and I was a lobbyist for a small business trade association,” Adams told FINalternatives in a recent phone interview. “So I've been following the plight of small businesses and medium-sized businesses for most of my career – looking at the difficulty they have in raising capital and particularly in getting growth capital.”

And while small and mid-sized companies have always had difficulty securing growth financing, the credit crisis has made the situation “much more dire,” says Adams, with  banks retreating from the commercial lending space.

But where banks see danger Adams sees opportunity: many of these firms have good credit quality, solid collateral and steady cashflows, he says, yet many have seen their lines of credit cut off. Woodhull's goal is to “fill the vacuum” left by retreating traditional lenders. But in designing an investment vehicle that can both provide assistance to businesses and returns to investors, Adams says he and his partners – David Lamb and H. Robison Dukes – first listened carefully to what investors had to say. And what investors said is that they want transparency and liquidity.

To address the first issue, Adams says the Woodhull Credit Opportunities Fund will allocate AUM into three transaction buckets with varying maturities: one third into receivables (30 days to 6 months), one third into bridge and medium (6-18 months), and one third into term (1-3 years).

“We know that investors are a little leery of credit strategies because it's hard for them to quickly get out of [them] and there's some concern about whether the strategies are liquid enough, so we have decided to build in liquidity by having those three buckets and we don't think we have to trade off much in the way of return.”

As for transparency, Adams says they've implemented a number of measures – most dramatically, having third-party administrator Butterfield Fulcrum build a “secure online facility” where investors can view all documents related to the portfolio in real-time.

“When you want to see the deal that we did yesterday or last week, you can log on and look at PDFs of the documents that were involved, satisfy yourself that the deal was real and that we're using prudent documentation prepared by our external counsel to protect investor rights or the fund's rights and the assets.”

“It's not that we're opening the kimono,” laughs Adams, “It's that we're not wearing any kimono at all.”

Other transparency measures include quarterly “mini-audits” by KPMG; the use of independent advisors in the Caymans, where the fund is based, to “review and execute” all transactions (Woodhull uses the Caymans-based DMS Management); and independent collateral appraisers.

Adams, who, as a founder and managing director for Cedar Lane Asset Management, oversaw an ABL fund worth $120 million, says that while small and mid-sized businesses' need for capital is a global reality, Woodhull will seek out companies in the U.S., Canada and the EU, where they can be sure of enforcing their legal rights. Woodhull's “secret sauce,” he says, is finding the right transactions, vetting them properly, monitoring them properly and seeing them through to a safe exit “all with a view to preserving and protecting principal.”

Minimum investment in the Woodhull Credit Opportunities Fund is $1 million and Adams expects its growth to be “organic.”

“Unlike a long-short fund that's immediately scalable without any difficulties, this fund will grow organically as investors and opportunities present themselves. We see a reasonable target as $500 million.”

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