Libyan-Backed Hedge Fund's Fundraising Challenged by Uprising

Date: Thursday, March 3, 2011
Author: Jesse Westbrook, Bloomberg

Former Bear Stearns Cos. executive Frederic Marino started an $800 million hedge fund with the backing of Muammar Qaddafi’s government. Now his plan to attract new investors is being threatened by fighting in the streets of the Libyan capital of Tripoli.

London-based FM Capital Partners Ltd., founded in 2009 with financing from a Libyan sovereign wealth fund, was preparing to raise money from other outside investors this year for the first time, according to two people briefed on the plans who declined to be identified because the firm is private. Those plans may have to be postponed after governments froze Qaddafi’s assets and global leaders rebuked his violent crackdown on dissidents, hedge-fund industry consultants said.

Libyan money is “a huge hindrance” to soliciting new investors, said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based consulting firm that advises hedge funds and investors. “Once there is a transition to a more stable government, their asset base should be a positive in helping them build the business.”

The turmoil in Libya has triggered uncertainty over what may happen to the nation’s foreign investments. Moody’s Investors Service Inc. last week downgraded Bahrain-based Arab Banking Corp., citing the fact that the company is 59 percent owned by Libya’s central bank. Shares of Milan-based UniCredit SpA (UCG), of which Libya’s biggest sovereign wealth fund owns a 2.6 percent stake, have fallen 8.3 percent since Feb. 17. Fitch Ratings cut Libya’s long-term issuer default ratings on March 1 to below investment grade.

Libyan Investments

Marino, 44, didn’t return three telephone calls and an e- mail from Bloomberg News seeking comment. He worked at Merrill Lynch & Co., Bear Stearns and JPMorgan Chase & Co. (JPM) before starting FM Capital, according to his registration with the U.K.’s Financial Services Authority.

Libya, through its $70 billion Libyan Investment Authority, also holds shares of Royal Bank of Scotland Group Plc (RBS), Finmeccanica SpA (FNC) and Pearson Plc, which owns the Financial Times newspaper, according to data compiled by Bloomberg.

The Libyan stake makes Pearson Chief Executive Officer Marjorie Scardino “uncomfortable,” she said on a Feb. 28 conference call. London-based Pearson’s interpretation of a U.K. asset freeze means shares owned by the Libyan sovereign wealth fund are “effectively frozen,” the company said in a statement.

The U.S. blocked Qaddafi and his government from accessing $30 billion of cash and securities, David Cohen, acting Treasury undersecretary for terrorism and financial intelligence, said Feb. 28.

U.K. Asset Freeze

The U.K. Treasury plans to scrutinize any transactions entered into by state investment funds because an asset freeze imposed Feb. 27 affects enterprises acting on behalf of Qaddafi and his family, said a person with knowledge of the matter.

Libya established its sovereign wealth funds in the past decade to try to get better returns on oil wealth than the nation was earning through bank deposits, according to the Las Vegas-based Sovereign Wealth Fund Institute, an organization that researches how government funds affect the global economy.

As Libya pursued foreign investments, Qaddafi traveled the globe to try to assuage politicians who had concerns about the nation’s past as a sponsor of terrorism in the 1980s, when U.S. President Ronald Reagan restricted travel and oil imports.

Five Funds

FM Capital started five hedge funds in 2010 with strategies including the FMCP Global Opportunities fund, which invests in stocks, currencies and bonds, and a so-called systematic fund, which relies on computers to decide when to buy and sell assets.

A fund that bets on rising and falling stock prices gained 2.4 percent from November to January, while a fund that tries to profit from corporate events such as mergers and bankruptcies fell 0.2 percent, according to data compiled by Bloomberg.

The firm had been conducting trades as usual earlier this week amid the unrest in Libya, said one of the people. FM Capital employees include Alexander Darre, who previously led hedge-fund strategies for Goldman Sachs Group Inc. (GS) in Europe, Asia and the Middle East, according to an FSA filing.

If a client’s assets are frozen it wouldn’t typically prevent a hedge fund or mutual fund from continuing to invest the money, said Stephen Crimmins, a law partner at K&L Gates in Washington. A freeze would prohibit the client from withdrawing money from an investment fund or selling shares of companies, said Crimmins, a former U.S. Securities and Exchange Commission attorney who’s worked on asset freezes with U.K. regulators.

Questions and Hurdles

“Considering how difficult it is to raise assets at the moment,” ties to Libya “will probably raise more questions and hurdles,” said Jerome Lussan, founder of Laven Partners LLP in London, which examines hedge funds for investors. “There’s also a reputational impact.”

In addition to managing money, FM Capital trains aspiring hedge-fund managers. The firm offers a three-year education program that focuses on portfolio management, trading, risk management and investment research, according to its website. Marino, in a September interview with the Financial Times, said the firm’s pupils had the potential to be the “next generation of hedge-fund managers in Libya.”

Mohamed Taher Siala, Libya’s former deputy foreign minister, sits on FM Capital’s board along with Ramadan Haggiagi, head of investments at the Libya Africa Investment Portfolio, according to a Companies House filing.

The Libya Africa Investment Portfolio, another sovereign wealth fund started in 2006 with $5 billion to invest, provided the financing for FM Capital and owns 55 percent of its shares, according to an August Companies House filing.

The remaining 45 percent of the firm is owned by companies controlled by Marino and his business associate Aurelien Bessot, a former London-based derivatives trader for Bank of America Corp. (BAC) Bessot, 35, didn’t respond to an e-mail seeking comment.

Calls and an e-mail to the Libyan Africa Investment Authority in Tripoli weren’t answered. The fund is overseen by the Libyan Investment Authority, according to its website.

To contact the reporter on this story: Jesse Westbrook in London at jwestbrook1@bloomberg.net