H2O’s Bruno Crastes Faces Solo Future for London Fund Manager He Built

(Bloomberg) - Bruno Crastes didn't let a liquidity scare derail his $ 38 billion empire.
The Star Bond manager saw the collapse of the LTCM hedge fund. He had survived the financial crisis and the European sovereign debt crisis and emerged stronger in each case. Now a fund freeze at famous UK stock picker Neil Woodford has put the spotlight on companies seeking returns on hard-to-sell assets, including H2O Asset Management, the boutique he co-founded in 2010. Crastes used video messages to prevent such comparisons.
"We never closed a gate and we will never score a gate," said the chief executive officer on the June 2019 tape, with both hands gesturing as he leaned forward. After all, he had named his company after the chemical name water to underline his commitment to liquidity.
A year and a half after that vote of confidence, the company's illiquid holdings are tucked away at the request of regulators, and Crastes, 55, faces an uncertain future as his largest financier pulls out. Natixis SA's decision to remove the majority stake and end the relationship means that H2O will not have access to the French bank's vast distribution network, at a time when assets have already fallen by more than a third since early 2019 and Confidence in some of the funds has been shaken.
A spokesman for H2O, which now manages around 20 billion euros, declined to comment.
Natixis has been key to H2O's success from the start. It provided operational support and access to investors, as well as a financial investment that brought the French bank just over 50% of the company. For much of the last decade, H2O has been a jewel in the crown of Natixis' money management stable, delighting an army of loyal customers with often outstanding performance at a time when negative interest rates elsewhere were starving return savers.
Crastes had made a name for himself in Credit Agricole SA asset management during the alternative absolute return fund boom in the early 2000s following the dot-com bubble and crash. In April 2005 he was rewarded with a promotion to Chief Executive Officer of Credit Agricole Asset Management UK.
Under Crastes and his predecessors, the division had an independent relationship with its French parent, and in addition to his duties as CEO, he continued to run money. However, the boom times for European banks came to an end with the financial crisis, forcing many to cut costs and limit the autonomy of star financiers like Crastes.
Read more about the problems of H2O:
H2O Divorce Talks Begin When Natixis Receives Decades of Support (3)
H2O Investors Pull $ 503 Million From Fund When Freeze Is Lifted (2)
H2O freezes eight funds under pressure from French regulator
At H2O, a model with changing tides tests an annual return of 20%
In 2010, Societe Generale SA and Credit Agricole merged their fund businesses to create Amundi SA, Europe's largest asset manager. Crastes was promoted again, leaving less time to focus on his main passion of betting in the financial markets, and the French lender's outpost in London lost some of its autonomy.
That same year, he left the house and set up H2O in an apartment he rented in the London borough of Kensington, a stone's throw from the Royal Palace, which Prince William, Duke of Cambridge calls home. He teamed up with an old colleague from Credit Agricole: Pascal Voisin, who now ran the Natixis fund arm.
Natixis invested in H2O and other French people including Chailley and Jean-Noel Alba followed Crastes of Amundi to start the new company. While Crastes and these MPs focused on making leveraged bets on currency fluctuations and bond prices, Natixis would help manage the distribution and fund infrastructure.
For years it was a perfect match - and H2O opened a store in the hedge fund haven of Mayfair. The company has generated remarkable returns and high performance fees for its owners, including Crastes, who is based in the Monaco tax haven. As of 2018, the company had sales of just £ 517 million and operating profit of more than £ 400 million ($ 526 million).
A turning point came when Crailes was introduced to Lars Windhorst by Chailley about five years ago. Windhorst was a prodigy of the German financial world in his twenties before going bankrupt. He moved to London and founded an investment empire that relied on private loan issuance rather than conventional bank financing. The H2O funds, which previously mainly focused on foreign exchange contracts and government bonds, began buying debt from Windhorst companies.
Until 2019, H2O was one of the largest holders of bonds issued by Windhorst, with holdings of more than one billion euros. The returns on illiquid investments became increasingly attractive in a low interest rate environment and also attracted the attention of other prominent financiers.
Stock picker Neil Woodford, a celebrity UK executive, had invested large sums in essentially illiquid equity investments - unlisted or thinly traded companies. When performance slowed and investors tried to pull money out of Woodford, he was unable to sell the illiquid securities to repay them. Woodford was forced to freeze his money to allow for an orderly liquidation.
Why investors are frightened by "liquidity mismatches": QuickTake
Morningstar Inc., which was investigating H2O's debt holdings, alarmed after a Financial Times report that Crastes' company faced similar risks. Panic broke out and investors withdrew, causing mostly bad headlines for a year and a half that ultimately led Natixis to throw in the towel.
Crastes took a different route than Woodford, since he had vowed not to raise his money. According to a person familiar with the matter, he sold back € 300 million in bonds to Windhorst's company at a price of around 90 cents for the euro. The remainder of the illiquid securities were discounted to fire sale prices, although some of the assets were trading at or near par at about the same time.
The haircuts meant that fleeing investors suffered a blow and the net asset value of the affected funds fell between 3% and 7%. H2O said at the time that the haircuts were made in accordance with fund regulations and "reflect a rating received from international banks".
Despite being hurt by outflows, the company still managed to deliver excellent returns in 2019, with some of its funds up 40% at the end of the year. However, the coronavirus prevented a lasting recovery and halved the size of some H2O funds in March. This resulted in the proportion of Windhorst's illiquid investments being too high for French regulators, who pressured H2O to freeze some of the funds for more than a month so that hard-to-sell assets could be segregated.
When the funds reopened last month, investors withdrew more than € 400 million, mostly from H2O's Adagio and MultiBonds funds. According to Bloomberg, around 1.6 billion euros in investor cash are enclosed in side pockets. While H2O has given investors shares in the less liquid funds, they cannot return them while the money manager attempts to sell the underlying securities back to Windhorst.
For Natixis, what started as a brief fear has turned into a series of damaging headlines that raise questions about risk controls and scrutiny. On Thursday, the bank pulled the plug and announced that H2O was no longer a “strategic asset” and that talks had begun about a “progressive and orderly dissolution of their partnership”.
H2O said the talks include plans to take over distribution of its products and expand sales to independent financial advisers. The company expects to make further announcements in due course about the impact on its business, "including its ownership structure and changes to its governance approach".
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