With $115 million in seed funding from an offshore equity partner, Sydney-based Shearwater Capital has begun targeting illiquid credit and special situations investment opportunities in the domestic corporate and real estate sectors. In June 2008, the manager, whose four co-founders have experience in both funds management and investment banking, was seeded by the US$3 billion Reservoir Capital Group, a

US manager that invests stakes in new private equity and hedge fund managers, in addition to running its own portfolios.

Shearwater focuses primarily on the Australian corporate and real estate markets, aiming to capitalise on liquidity stress by investing in a wide assortment of illiquid debt instruments, such as performing and non-performing debt portfolios, distressed debt and mezzanine debt. “We’re agnostic on industry, and we’re prepared to look through the capital structure, debt and equity,” Gary Stead, a co-founder, said.

Shearwater will invest in out-offavour assets that have become illiquid or are undergoing fundamental change, and well-performing companies experiencing some form of liquidity stress, for periods of between two and four years. It will not seek controlling stakes in order to avoid any board disputes or litigation that might arise. “The best protection in credit and equity is being associated with good businesses.

You can invest in a company and not lumber them with a massive coupon.” This type of strategy is a “welltrodden path” in the US, Europe and Asia, but Shearwater was the first such manager established in

Australia, Stead claimed. The manager saw the bursting of the debt bubble and consequent draining of liquidity from the global financial system as a structural change in the economy.

“We don’t see this as a blip. We’ve had around 17 years of a lot of credit that was underpinning a certain growth rate. Going forward, we won’t get access to this credit,” Stead said. “It’s not a window of opportunity but more of a fundamental change in [economic] growth and access to credit.” The careers of three of the cofounders overlapped at Merrill Lynch during the Asian financial crisis. “The Asian crisis hit distressed companies, but this time good companies are finding it hard to access capital,” Welch said.

Back then, there were pockets of liquidity, which flowed out of the US, Middle East and Australia and into opportunistic trades in Asia. This time, however, surges of foreign capital into stressed markets have not come. “Investors and banks are focusing on their own markets,” Stead said. Shearwater’s relationship with Reservoir, which holds a minority equity stake in the manager, could give it access to other managers seeded by the

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