Elliott Asia Alumni are Said to Plan Special Situations Fund

Jul 11, 2014 2:13 am ET

(Updates with comments from GFIA principal in fourth paragraph.)

July 11 (Bloomberg) -- Two former Asia employees of Elliott Management Corp., Paul Singer’s $24 billion hedge-fund company, plan to start a special situations fund for less liquid investments, said a person with knowledge of the matter.

Kenneth Ng and Arthur Lau have set up Ark Pacific Capital Management Ltd. in Hong Kong, according to licensing data from the city’s Securities and Futures Commission. Ark Pacific plans to raise $100 million of capital commitments from investors to make loans to companies, invest in private convertible bond issues and in companies before they go public, said the person, who asked not to be identified as the information is private.

Asset managers including Hong Kong-based PAG and Tor Investment Management (Hong Kong) Ltd. have set up funds to exploit financing opportunities for companies after global banks scaled back their lending in the region amid tighter regulatory scrutiny such as Basel III over their capital and business activities.

“This is a niche that banks have largely abandoned in the wake of Basel III and rampant over-regulation,” said Peter Douglas, principal of Singapore-based research firm GFIA Pte, referring to the capital accord affecting banks. “Companies’ financing needs remain. It’s therefore a lucrative strategy for experienced professionals who can allocate capital according to investment criteria, as opposed to regulatory geopolitics.”

Asian Wealth

Ng and Lau are tapping demand from Asia’s wealthy families and individuals for stable returns that can be realized faster than investments in private equity funds, the person said. Starting their own firm will allow them to explore investment opportunities too small for bigger hedge funds like Elliott and to co-invest in larger deals with their backers, the person added. Ng declined to comment.

Managers using this strategy may benefit from this year on as interest rates begin to rise and small to mid-sized companies in the region experience a credit squeeze, said Mohammad Hassan, an analyst at Singapore-based data provider Eurekahedge Pte.

Eurekahedge lumps such funds into its Asia event-driven hedge fund index, which has gained 3.1 percent in the first six months, or its Asia distressed debt hedge fund index, which rose 1.3 percent this year. Its broader Asian hedge fund index advanced 2 percent in the period.

Regional Deals

Ng and Lau worked together at Elliott for six years, both focusing on Greater China, according to the person. Ng joined Elliott in 2005 and left in January as an executive director, and Lau worked for the U.S. firm between 2007 and October last year, most recently as an investment director, the person said.

The New York-based hedge fund firm, which has generated a 14 percent annual return for investors since its inception in 1977, invests in securities including debt and equities using a number of strategies, according to a fact sheet.

It has been involved in regional corporate deals such as Overseas-Chinese Banking Corp.’s ongoing attempt to take over the family-controlled Wing Hang Bank Ltd. in Hong Kong, in which it has built up stakes in the target companies in attempts to extract sweetened offers, according to regulatory filings.

The Ark Pacific fund targets mid-20 percent returns and will initially focus on Greater China opportunities, with South Korea and Southeast Asia also considered, said the person. It will make two- to three-year private loans to companies, said the person.

Convertible Bonds

It also plans to invest in private convertible bond issues by companies with a market value of $300 million to $500 million, the person added. A third strategy is to make private- equity-like investments in companies that are expected to go public in two years, according to the person.

The firm targets to gather $50 million of capital commitments from investors by the first fundraising deadline in the fourth quarter, according to the person. The commitments will be drawn down when it finds investment opportunities, the person added.

Investors in the Ark Pacific fund won’t be able to withdraw their initial investments within the first three years, said the person.

Ng and Lau will be co-chief investment officers of Ark Pacific, with Ng doubling as managing partner, a chief executive officer-like role, said the person. Lau will have the additional responsibilities of fundraising and finding deals, the person said.