Issuer Services

Restoring Confidence: Kroll's Support in H2O Asset Management’s Journey from Side-Pocketing to Settlement

 

The Situation

H2O Asset Management LLP (H2O AM), a prominent asset management firm¹, faced significant challenges in 2020 due to the underperformance of several of its managed funds, known as the Initial Funds. These funds had investments in private securities, made between 2015 and 2019. In the first half of 2020, adverse market conditions led to a marked decline in the total net asset value of the Initial Funds. This downturn resulted in a mechanical increase in the relative weight of private securities within the portfolios.

Trigger Event: Side-Pocketing Process

On August 28, 2020, concerns over the valuation of these private securities prompted regulatory intervention. The Autorité des Marchés Financiers (AMF) mandated the suspension of three affected Initial Funds². In response, the firm initiated a side-pocketing process: a ring-fencing mechanism that segregated investments in private securities from the rest of the fund assets. This process created a separate class of funds, referred to as the SP Funds, holding only the private securities investments.

Impact on Investors

While they regained access to the majority of their capital, which was transferred to liquid funds, investors in the Initial Funds found a portion of their capital effectively locked in these SP Funds, awaiting a viable exit strategy. H2O AM recognized the need to provide a solution for these investors and sought opportunities to facilitate liquidity and restore confidence.

Regulatory Investigation and Resolution

In parallel, the UK Financial Conduct Authority (FCA) launched an investigation into the investment practices surrounding the side-pocketed assets. This regulatory scrutiny culminated in an announcement on August 7, 2024, marking the conclusion of settlement discussions.

Notably, no admission of liability was required from H2O AM, and the FCA opted against imposing a financial penalty. Instead, the H2O AM Group voluntarily committed to notably securing €250 million to purchase affected units from unitholders, forming the basis of a new Offer for SP Fund investors.

 

The Challenge

H2O AM was faced with a significant test of resilience and credibility after a series of illiquid investments led to the side-pocketing of assets within several of its funds. Investors in those funds were faced with uncertainty as to when they would be able to sell their SP and at which price.

Recognizing the adverse impacts that the situation caused for their investors who were unable to redeem, H2O AM committed to finding a pathway that would deliver liquidity to affected investors and reestablish confidence in its stewardship. In order to address both regulatory expectations and investor concerns, H2O AM needed an independent and highly reputable partner to oversee the process and ensure its integrity.

 

Kroll's Solution

Kroll, recognized globally for its proven track record with high-profile, sensitive financial matters, was engaged to oversee the voluntary tender process for unitholders. The firm delivered a comprehensive and expedited solution outpacing industry standards, efficiently managing a structured program that enabled unitholders to tender their units for a proportionate share of the €250 million allocated by H2O AM.

Kroll deployed a dedicated, multidisciplinary team of experts who seamlessly managed every aspect of the voluntary tender process. This unified approach allowed Kroll to oversee all aspects of the program—from execution to stakeholder support—swiftly and efficiently, with every stage handled in-house to ensure consistency and a high level of diligence.

Kroll Issuer Services oversaw and settled the voluntary repurchase offer, built and maintained the online infrastructure for tender submissions, provided information to stakeholders and acted as cash manager. They managed payments, coordinated the delivery and cancellation of repurchased units and handled communications with unitholders.

Kroll’s Investigations, Diligence and Compliance practice conducted Know Your Customer (KYC) checks and screening on unitholders, ensuring compliance with the company’s requirements and legal advice.

Kroll’s Restructuring practice adjudicated all tender submissions in line with the company’s and counsel’s guidelines.

Kroll Agency and Trustee Services provided security trustee and escrow agency services, with security over the company’s bank account being held for and on behalf of the unitholders until the defined termination date.

 

The Impact

H2O AM’s partnership with Kroll, which provided a comprehensive end-to-end solution for the engagement, resulted in an efficient and timely investor offering. Additionally, this collaboration underscored H2O AM’s dedication to rebuilding trust by emphasizing accountability and resolution for all stakeholders, including investors, regulators and the wider market.

More than 80,000 creditors participated by tendering their units, which represented more than 79.5% participation. Kroll continues to work with H2O AM to support subsequent offerings for additional funds.

 

Sources:
¹ H2O AM has now ceased regulated activities and is no longer an authorized firm since 24.07.2025 following its voluntary application to cancel its UK permissions.
² H2O AM voluntarily suspended four additional funds holding the same securities.