Centrecourt: Big Fish In Small Pond

Sep 24 2007 | 1:40pm ET

The ongoing chaos in the credit market has made a few notable winners, and many more losers, in the hedge fund universe. Count New York-based Centrecourt Asset Management on the winning team.

Year-to-date, the $400 million firm’s flagship CAM Opportunity Fund has returned approximately 12% through August, and its recently launched concentrated fund, CAM Horizon, is up some 57% through August.  Both invest in the debt, as well as equity and equity-linked securities of small-cap public and select private companies. The investments are generally structured as collateralized debt securities with an equity component.

Centrecourt Asset Management's Richard Smithline Richard Smithline“With the debacle in the sub-prime sector, which has adversely impacted the high yield sector, and the banks holding onto loans which they have been unable to syndicate, we’re looking to opportunistically purchase the securities that others have been forced to liquidate,” says Centrecourt CEO Richard Smithline.

“The debt market got priced very tightly, and as funds unwind their positions it becomes very painful, not only to those funds but also to other funds that are invested in such funds, some of which are highly levered. So in the next few months we feel that we should be seeing a lot of opportunities.”

Small-Cap Happy Zone

Smithline is no stranger to the credit space, having served as a partner at Scoggin Capital Management, an event-driven, special situations hedge fund, and as a managing director at Wasserstein Perella & Co. and its successor, Dresdner Kleinwort Wasserstein, initially in leveraged finance and subsequently in the media, telecommunications and technology group.

Centrecourt prefers to find opportunities in the less-populated small-cap space, which the bigger hedge funds don’t focus on and where the pricing can be less efficient. “What I’ve found is that if a company needs under $20 million of capital, it usually cannot get the attention of a large hedge fund or a first-tier investment bank because it’s just not worth their while from a capital standpoint,” Smithline says. “We want to fund deals that aren’t shopped by first-tier investment bankers in an organized process in which we would be competing with other hedge funds and compressing the pricing of the deals.”

“We feel like we have a strategy that we’re doing a little differently from everybody on the Street. We like to view ourselves as the Goldman Sachs of the smaller-cap market because if you look at the backgrounds of the people at our fund, there’s really no other fund in the space in which the backgrounds of the individuals compare.”

The firm’s investment team is comprised of investment bankers, former corporate partners at major law firms, and certified public accountants and its back office is anchored by a state-of-the-art system to monitor its portfolio and help manage its risk.
The firm’s penchant for the small-cap space also stems from its ability to influence positive outcomes for its investments much in the way private equity shops do–it also takes a private equity outlook toward management teams. “We’re less interested in stories and more interested in assets and cash flow. We generally take a sanguine view on managements’ hitting their projections,” says Smithline. “We’re making private equity-like investments trying to generate private equity-like returns. But unlike private equity, we’re generally making investments generally in the form of collateralized debt securities. In addition, our investments have enhanced liquidity to those of private equity investments.”

Centrecourt invests primarily in U.S.-based companies in an array of industries ranging from energy to healthcare in a highly diversified manner with no positions greater than 5% of the fund. Its transactions are all structured to protect the downside for its investors while achieving high risk-adjusted returns.

“Each deal is structured differently. Some are structured as convertible debt securities and others as non-convertible debt and we get an equity or warrant component with the deals. Sometimes we’ll take our capital off the table and hold the warrants or we will exercise the warrants if the stock hits our price target or if the company makes it worthwhile (i.e. takes down our exercise price and/or gives us replacement warrants). We’ve been successful protecting the downside and we haven’t had one down month,” says Smithline.

Going forward, Smithline is eagerly anticipating another drop in the housing market in the aftermath of the Bear Stearns’ funds blow-up. “Bear built up a big business by packaging mortgages and selling them and there were a lot of people who took advantage of teaser interest rates and now that those rates are increasing, there’s going to be a lot of problems out there. You don’t want to step in too early and catch a falling knife, but while other people are sitting on their hands, that’s generally the time to step in and make some opportunistic purchases.”

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