Private-equity firm Carlyle Group LP has split with the founders
of its Vermillion commodity hedge-fund firm after its flagship fund
shrank from $2 billion to less than $50 million in assets,
according to people familiar with the matter.
Vermillion Asset Management LLC's Viridian commodity fund, which
traded in oil, metals and agricultural markets, has seen assets
dwindle after heavy losses and a wave of investor redemptions, the
people said. The fund lost 23% in 2014; the latest investor exits
began in the spring and the fund reached a nadir in recent
weeks.
Christopher Nygaard and Drew Gilbert, who co-founded Vermillion
in 2005 and sold a majority equity stake in the firm to Carlyle in
2012, left at the end of June, these people said. The firm is
retreating from prior investments in oil, natural gas, coal, iron
ore and agriculture, and traders and strategists involved in
managing those strategies are leaving, these people said.
The turmoil at Vermillion adds to a growing list of troubles for
Carlyle's hedge-fund business. Claren Road Asset Management, a $4.9
billion hedge-fund firm also owned by the private-equity firm,
faces the prospect of investor withdrawals after an influential
consultant advised clients who are invested in the fund to pull
their money, The Wall Street Journal reported this week.
The changes at Vermillion are still in the works and haven't
been publicly announced.
Sean Brennan, Vermillion's portfolio manager for oil and energy
markets, has been hired at Israel Englander's $30 billion
Millennium Management LLC, though Mr. Brennan is still listed on
Vermillion's website.
Mr. Nygaard and Mr. Gilbert declined to comment. Mr. Brennan
didn't respond to a request for comment.
Vermillion is the latest in a string of commodity trading firms
to get battered by a collapsing market for raw materials. Commodity
prices have plunged due to a combination of factors including a
stronger dollar, an expected increase in U.S. interest rates and an
expectation that cooling economic growth in China will undermine
the country's voracious appetite for raw materials. The S&P
GSCI commodity index, a key tracker of commodity prices, has lost
more than 8% this year and reached its lowest level since 2002.
Funds that trade across different commodity markets have been
among the hardest hit, as the widespread downturn has included
double-digit declines this year for everything from oil to wheat to
copper to sugar. This week alone, commodity-trading giants Armajaro
Assets Ltd. and Black River Asset Management LLC, a unit of Cargill
Inc., said they were closing funds.
Mr. Nygaard and Mr. Gilbert co-founded Vermillion in 2005.
Carlyle, one of the largest investment-management firms in the U.S.
with assets of nearly $200 billion, bought a 55% equity stake in
2012, trumpeting the deal amid an expansion of its investment
offerings beyond its traditional focus on leveraged buyouts.
But its Viridian fund ran into headwinds in 2013 and 2014 as
commodity markets pulled back from their previous rapid growth. The
firm had a successful strategy trading securities in an esoteric
market tied to the price of shipping dry goods on the high seas,
and ramped up its investment as returns improved in 2013 and early
2014. But that withered as the firm remained bullish even as
freight rates collapsed to historic lows in the second half of 2014
and early 2015, losing more than 30% in the process. The position
remains in the red, though it has recovered somewhat recently.
Two of Carlyle's co-founders, David Rubenstein and William
Conway, invested their own money in the firm to the tune of $30
million, according to a person with knowledge of its operations,
and kept it there even amid the losses and redemptions from other
investors. The current value of their stakes is unknown.
Vermillion will continue managing investments in metals and
freight-rate strategies, and the flagship fund remains in operation
despite the low level of capital; Vermillion also has added new
investment vehicles offering broad bullish exposure to a basket of
commodity markets, and has a new venture in commodity finance
lending that executives think can grow into a multibillion-dollar
business.
In a statement, Carlyle said it is "repositioning our
commodities business, particularly in commodities finance, to
capture an enormous global opportunity."
Vermillion had $2.2 billion under management at the time of the
Carlyle acquisition; its assets in the legacy flagship, metals and
freight funds have fallen to just over $400 million since then,
though the new strategies in lending and index products have added
about $1 billion. The firm's total assets under management now
stand at $1.4 billion.
Tatyana Shumsky contributed to this article.
Write to Christian Berthelsen at christian.berthelsen@wsj.com
and Rob Copeland at rob.copeland@wsj.com
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