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
Europe and Asia, but Shearwater was the first such manager established in

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
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

US company for
potential co-investment deals.


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