Highbridge credit business soon to go it alone

Highbridge Principal Strategies, the private debt business within hedge fund Highbridge Capital, is close to a deal to spin out from the hedge fund and JPMorgan Chase, its parent.  

Highbridge Principal Strategies (HPS), the credit business within Highbridge Capital, is close to finalising a management buyout. The deal would see the lender separate from both Highbridge Capital’s hedge fund unit and its parent, JPMorgan Chase.

The principal strategies arm has grown to become the larger, more dominant part of the business since its launch in 2007, when Scott Kapnick (pictured) joined from Goldman Sachs to lead it. The multi-strategy hedge funds, meanwhile, have shrunk on the back of unimpressive returns, sources tell PDI. HPS now oversees $22 billion, while the hedge funds manage $6 billion.

A Highbridge spokesman declined to comment.

Institutional Investor revealed last year that Highbridge Capital was planning an exit from JPMorgan, while sources have recently told PDI that it’s the HPS group specifically that would be spinning out soon, while the hedge funds would remain under the ownership of the bank. Kapnick, along with Michael Patterson, who leads the firm’s direct lending strategies, Scot French, who oversees mezzanine, and other company management is planning to execute the buyout soon, sources familiar with the situation tell PDI.

HPS has been scoring large institutional separate account mandates, posting good returns, launching new strategies and hiring new people, while the hedge fund business is more challenged, the sources explained. The South Carolina Retirement System recently invested in a $400 million multi-strategy separate account with Highbridge, while the Arizona State Retirement System placed large chunks of money with Highbridge mezzanine and real estate strategies this summer.

The firm is also in the process of raising its first European asset-based lending fund with a team it hired from Fortress. The credit group has also been hiring more private equity and credit specialists from rivals in London to bolster its European presence.

The Highbridge Capital Corporation multi-strategy hedge fund lost 2.7 percent in September while posting 3.32 percent returns for the nine months to 30 September. It was up 6.16 percent over the last 12 months on 30 September, according to an HSBC hedge fund performance report obtained by PDI. The vehicle had $963 million in assets as of July, according to HSBC. CNBC reported last year that the hedge funds at Highbridge have stalled from a conflation of falling assets, lower performance relative to their peer group and some departures.

The hedge fund business has also lately been challenged by an investigation from the CFTC on whether J.P.Morgan steered its private capital clients into the hedge funds without issuing the proper disclosures, according to The Wall Street Journal.

The original founders of the hedge fund business, Glenn Dubin and Henry Swieca, have left in recent years. Dubin stepped down from his chief executive post last year, handing the reins to Kapnick. While Swieca, who was formerly chief investment officer, left in 2009. Mark Vanacore now leads the hedge funds as chief investment officer and would remain in that role within JPMorgan after the HPS group spins out.

Kapnick came over in 2007 to kick start the HPS business. JPMorgan bought the firm in 2004. It was founded by Dubin and Swieca in 1992.