Capital Markets

Hedge Fund’s Art of a Bankruptcy

Picture this: Loan maker of last resort now has its back to the wall.
Stephen TaubAugust 19, 2008

Even hedge funds are not immune to the credit crunch. A small hedge fund that provided short-term debt to companies has filed for Chapter 11 bankruptcy protection.

Greenwich, Connecticut-based SageCrest Finance, managed by Windmill Management, said in its Chapter 11 petition filed in U.S. bankruptcy court that it had listed assets of $50 million to $100 million, and debt between $1 million and $10 million, reported Reuters. The fund had about $1 billion in assets under management as recently as a year ago, according to hedgefund.net.

In fact, the website points out that the credit crunch put the squeeze on SageCrest’s business strategy — which is providing asset-backed specialty financing to smaller private companies that have been closed out of traditional sources of capital. Many of its projects involved extending art-, real estate-, and structured settlement-based loans.

In April, the Financial Times said the fund ran into trouble when several large loans went bad, including loans to finance art purchases in New York.

SageCrest has a credit line with Deutsche Bank, which is demanding the fund deleverage its balance sheet by selling off its assets quickly, noted hedgefund.net. “Ultimately we believe Deutsche Bank will be paid in full and investors will receive a substantial distribution through a rational and reasoned approach to the liquidation of assets,” a letter from the fund reportedly said.

The website also notes that hedge fund firm Wood Creek Capital Management went to court this year seeking repayment of its $5.8 million investment in SageCrest. The sputtering fund company is also locked in a legal dispute with Christie’s auction house, which has alleged that SageCrest fraudulently entered into two loans that were both backed by the same 45 oil paintings, said the New York Post in an article published earlier this year.

The SageCrest website says that the company provides primarily short-term, senior, secured loans to client companies in a broad cross-section of industries ranging from real estate to specialty finance companies involved in developing asset-backed portfolios. Its team is led by Philip and Alan Minton of Windmill Management.