SoCal Firm Launches PIPE Hedge Fund

Mar 24 2006 | 8:03pm ET

Signal Capital Management has just launched its first hedge fund, a multi-strategy fund that will make private investments in public equities (PIPEs). The firm is also doubling its staff in anticipation of adding three more products to its line-up later this year.
Shane Rodgers, chairman and ceo, said the Signal Special Opportunities Fund will take a longer-term, private equity approach to investing, holding its positions in PIPEs for 6-12 months. The firm will also invest in private companies that are close to going public, and will hold these positions for a slightly longer timeframe, 12-18 months.   

"What we are investing in are PIPE transactions with embedded hedges to protect our principal," he said, explaining that there are several ways to do this. One deal they have documented but not yet executed is structured as a convertible debenture. "It has a base value of $3 million, and it doesn't convert to common stock at 30 cents per share until we actually start liquidating, so if the stock price falls below 30 cents, our principal is protected." He added that there is a backup embedded hedge in the form of a ratchet clause. "If a stock price falls below 25 cents, they have to increase the number of shares in the conversion as well."
In addition to investing in PIPEs and private companies, 20% of the portfolio will be slated for foreign exchange. The new fund has been set up as an onshore vehicle and is targeting primarily U.S. institutional investors, which Rodgers believes will make up approximately 70% of investors, while remaining 30% will be high-net-worth individuals.
"We have structured everything to meet their [institutional investors'] needs," said Rodgers.
Both Rodgers and Klein said that in addition to the private equity and operational experience of the team members, what makes their firm attractive to institutional investors is that the PIPEs space is its core competency.
"We know how to make these investments, we know how to structure them, we know how to exit them, and we know how to manage and price the risk," said Rodgers. The target close for the fund is $250 million. The minimum investment is $250,000 and there is a 60-day lockup. The firm charges 2% for management and 20% for performance.
In anticipation of launching three more products later this year, the Los Angeles-based firm is beefing up its team. Currently, Signal Capital has a core staff of six, but in the process of hiring two investment bankers, two financial analysts, an in-house council and various support staff. The firm also has plans to hire a chief investment officer in the near future.
"We will probably reach 15 people, in that vicinity," said Arnie Klein, president and chief operating officer.

The first of the three offerings now in the works is an existing publicly traded REIT, which the firm is aiming to take over and pump $500 million into. Rodgers explained that the second new product would be a spin-off of the property fund.
"We could bifurcate the REIT into different sub-REITs, because we want to do a mortgage REIT for example," he said. "We could create side pockets, or even a completely different entity, because we know how to make the mortgages and we also know how to trade them."
Finally, the third fund the firm is working on is a multi-strategy quantitative fund, in which the firm is teaming up with two traders in Los Angeles.

"What we are doing now is creating a side pocket to our existing fund and tipping $5 million in from a single investor in New York…e will trade that for 12 months, then go out through a major institutional fund marketing firm and raise another $200 million plus."

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