2010 Annual Report - Harbert Management Corporation

erosion of the dollar and deterioration of sovereign and state
creditworthiness. It was a very frustrating time for us as an investment
management firm because we felt there were many excellent opportunities
to put capital to work in investments with attractive absolute returns and
without exposure to these macro risks. Unfortunately, because of the fear
caused by the 2008 and 2009 collapse it was extremely challenging to
convince others of the propriety of investing.
Perhaps the most striking example of the conundrum we faced was in our
Australian private equity strategy. We launched the fund in late 2008 with
HMC partner capital and began to make investments. The economic and
investment environment in Australia proved to be even better than we had
expected. We made several investments in 2009 and 2010 in rapidly growing
businesses at valuations substantially below levels that could have been
achieved in the U.S. HMC opened the fund to third-party investors, but found
very few. In the fall of this year the embedded value of the portfolio had
increased to the point that the current investments had to be “ring fenced”
to protect the few partners in the fund from experiencing unfair dilution.
Ultimately, HMC and the fund’s other investors added additional capital to
the partnership and closed it to new investors.
Our ability to find attractive investments at a pace that exceeded our thirdparty
fundraising continued into the fourth quarter of 2010. Two notable
examples were the acquisition of an 18-story West London office tower
and the purchase of the equity interests of GWF Energy from an affiliate
of a public utility. Both of these transactions represented exceedingly
attractive “special situation” investments. The HMC European Real Estate
team was able to renegotiate the key leases in this office building, prior to
closing, resulting in an extremely attractive pro forma going in yield and
expected return. The GWF Energy deal was the culmination of years of
work by Harbert Power Corporation who had owned a minority interest in
the assets and negotiated the recent purchase contingent upon obtaining a
long-term power sales agreement and the authority to expand the facilities
and convert them to combined cycle power generation.
Despite the apparent attractiveness of these and other transactions,
investors have been slow to commit to new funds and investments.
Consequently, a very high percentage of committed and “closed on” capital
in 2010 came from HMC shareholders and affiliates.
As our aforementioned “frustration” intensified and became somewhat
“institutionalized,” the HMC executive committee engaged an independent
consulting firm in the second quarter of 2010 to evaluate and assess
HMC’s business principles, practices and overall business model. We
had not sought out third-party advice and input on Harbert Management
Corporation since its founding 17 years ago.
Harbert Management Corporation
Our ability to find
attractive investments at
a pace that exceeded our
third party fundraising
continued into the fourth
quarter of 2010.
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