Laurus Launches Second Asset-Based Hedge Fund

Jul 13 2007 | 11:51am ET

Having lived up to its name—which means “success” in Latin—New York-based Laurus Capital Management isn’t resting on it’s laurels, launching a successor to its flagship first fund as it mulls two further launches in the future.

Just a month after hard-closing its six-year-old Laurus Fund with $1.8 billion, the firm launched the Valens Fund on June 1. The new offering, which utilizes the same asset-based direct-investing strategy as its predecessor, got off the ground with $10 million in initial equity, and as of July 1 boasted $26 million in assets.

According to Dennis Pollack, a partner and senior managing director at Laurus, the new fund invests primarily in publicly-traded small- and micro-cap companies with growth strategies and tangible collateral, though approximately 10% of the portfolio is invested in privately-held concerns. But in addition to its fixed-income investments—generally, three-year loans at prime plus two floating, with an average loan size of under $10 million—the firm reaps free equity, which Pollack calls “free lottery tickets,” in every deal.

“It’s hard to predict which ones will do well in a particular cycle, and which ones won’t,” he says. “The more companies you put in the portfolio”—currently, Laurus Capital’s portfolio boasts about 175 names—the more free equity you get.”

In fact, Pollack notes that the firm, which is headed by portfolio managers Eugene and David Grin, decided to close the Laurus fund, which boasts annualized returns since inception of better than 18%, to focus on the equity stakes it has built up over the past seven years. “We’re harvesting the equity and trying to get some nice returns out of that,” he says.

The Valens fund is designed to pick up where the Laurus fund left off, continuing to fund about $100 million in new transactions every month. Pollack says the firm is targeting returns in the low- to mid-teens for Valens, adding that the opportunities for this “unusual hybrid of a bank and a traditional PIPE fund” are growing in number and quality.

“When you have these types of concerns about the economy”—the sub-prime debacle, job losses, the war—“the first things banks do is tighten the screws on credit,” Pollack says. “So for us, there are increasing opportunities. More companies are approaching us, and we see better-quality companies approaching us for that growth capital. Now we get to cherry-pick very good quality companies that ordinarily would stay with their banks.” The changing environment has already paid off: Valens returned 2.2% in June, its first month in business.

Nor does the downturn in the equities market frighten Pollack, who says that the Laurus Fund has had only one down month since inception in January 2001.

“The beauty is that it is so broadly diversified, by geographics, industry sector, market-cap, and where the equities are traded,” he says.

Valens offers two share-classes: an A class with a 12-month soft lockup, with quarterly redemptions thereafter, charging 2% for management and 20% for performance with a $1 million minimum investment requirement, and a B class with a three-year hard lockup, with annual redemptions, a 1.5% management fee, a 15% performance fee and a $5 million minimum investment. Pollack says the firm has over 300 investors—mostly large institutions—and that those investors are given priority to invest in Valens.

Not content to rest with the new fund, Pollack says that Laurus, a Securities and Exchange Commission-registered investment adviser, is considering the launch of a levered version of the Valens fund sometime in the fall, as well as a listed vehicle to raise permanent capital.

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