Talk about bucking a trend. While money flows into activist funds faster than Carl Icahn can utter “stock buyback,” one activist hedge fund firm is actually closing two funds to new investors.
U.K. activist fund manager, Martin Hughes, is closing Tosca Opportunity and its sister fund, Tosca Mid Cap, to additional inflows after June 2, according to sources. Hughes currently manages $900 million under the activist strategy.
Hughes has told investors that the expected performance of the fund’s net asset value takes priority over the size of the funds managed.
“In being by far the largest shareholder, the PM [portfolio manager] is unashamedly protecting his own interests in setting out to maximize the upward movement of the net asset value, rather than allow asset-gathering to dilute the returns of current investments, some of which now approach the reasonable investment limit,” said Tosca’s April month-end letter. “I hope the shareholders agree that this is an unequivocally positive situation for all shareholders.”
Hughes deploys a private equity-style investment horizon and targets returns in public companies. He tells clients in his announcements that he figures that his core holdings, many of which he has held for at least four years, will take up to an additional two years to reach their fair valuations and/or exits. So, he anticipates the funds will remain closed to inflows for at least two years.
Among his current investments: U.K. telecom-service companies such as Colt Telecom and Daisy and U.K.-based pharmaceutical company, Sinclair IS Pharma, which he has owned for three years.
On Wednesday, George Soros reported owning slightly more than 5 percent of Sinclair’s voting rights, according to Market Folly.
Hughes says in an e-mail exchange that for the past year Tosca has supported “by provision of finance and due diligence” a series of acquisitions made by Sinclair that has turned a low-margin, slow-growth company into a high-margin, fast-growth company that specializes in aesthetic dermatology. “That process is now complete following the April acquisition of Silhouette which offers a superior product to Botox,” he adds. “If Sinclair is to be valued at the same basis as Allergen, then the equity would be worth up to £400 million ($678 million) within two years.”
Tosca owns 28 percent of the equity and the current value in London is just £150 million ($254 million). “One of the reasons the fund is closing to inflows,” Hughes adds.
Hughes, who once served as chairman of Tiger Management Europe, is perhaps the hottest Tiger Cub over the past few years. Hughes founded Toscafund in 2000. Last year the firm was up 56.2 percent and in 2012 it rose 34.1 percent. As a result, he has posted a 14.4 percent annualized return in his fund since its 2005 inception. This compares with the benchmark MSCI World Index’s return of 4 percent.
Hughes’ decision to close his fund to new money is refreshing given the ease of which activists are raising money. Some with great track records deserve the inflows, such as Jeffrey Ubben’s ValueAct Capital and Barry Rosenstein’s Jana Partners.
Of course, at year-end Daniel Loeb’s Third Point and Jonathon Jacobson’s Highfields, both of which sometimes engage in activism, each returned about $2 billion to investors.
