few months after closing its acquisition of Flatiron Capital Management — rumoured to be a $10.7-million deal, about half of which was paid in stock — Sprott Asset Management has made some substantial changes to some of the funds it acquired.
When the acquisition was announced in June, the funds had about $275-million in assets; when the deal closed two months later, the funds had about $260-million under management. At the end of November the funds were home to about $140-million in assets.
For instance in response to “a most unfortunate and most undesired situation,” the changes include:
• Front Street Investment Management Inc. an affiliate of Front Street Capital and Sprott, will be appointed as co-investment advisors to three funds for at least six months. (The term can be extended.)
The funds are the Front Street Strategic Yield Fund Ltd., the Flatiron Strategic Yield Ltd., and the Sprott Flatiron Yield Trust. Prior to this, the funds — a number of which have suffered major redemptions of late — were managed by Flatiron Capital Management. That firm has now been relieved of its duties.
Some investors are concerned that the new management team lacks the necessary experience to run the funds given that the team at Flatiron was acquired by Sprott as a means of broadening its product base. As well, the Flatiron team has a 12-year track record of strong performance. The new managers are Frank Mersch and Eric Dzuba from Front Street and John Wilson, Scott Colbourne and Michael Craig from Sprott. The newly-merged team is expected to have a different approach to investing. “No one is in love with any stock,” was the message in Monday’s conference call.
Of particular interest is the Front Street Strategic Yield Fund Ltd., a market neutral fund advised by Flatiron on which Front Street was the manager. It was formed “to preserve capital in market downturns and to participate in rising markets,” by investing in convertible debentures and warrants of Canadian issuers as well as merger arbitrage.
Flatiron, which employs top-down macroeconomic and quantitative analysis to execute their investment strategy, posted a net asset value that was down by 31.99% in November. “We are disappointed at Flatiron and at Front Street,” said one frustrated advisor on Monday’s conference call who was critical of the way that investors have been kept informed about developments at the fund. The fund’s NAV was $6.24. One month earlier the NAV was $9.184.
In secondary market trading, the units closed Monday at $6.01.
In a conference call Monday, investors were told that the problems at Flatiron weren’t related to leverage but a series of events — a so-called “perfect storm” caused by liquidity (including a loss on a major investment in Great Basin Gold), which led to a concentration of the securities in the portfolio that eventually caused a withdrawal of bids for the securities.
• One other fund Flatiron Market Neutral LP is being wound up effective Nov. 30. In a release it was said that there will be “no further redemptions or subscriptions in FMN LP will be processed, which Sprott believes will allow for the liquidation of FMN LP’s portfolio securities in a consistent and orderly manner.”
- Sprott Flatiron Convertible Strategies Trust issue cancelled after failing to raise more than $20M (business.financialpost.com)