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October 17, 2007

Comments

JT

Let's talk side pockets.

I am curious to get some more views on the following. Imagine you have a manager (fund) who controls 75% of the outstanding shares of a microcap public company whose avg daily trading volume is approx. 50K per day. Also assume that the manager is the Chairman of the Board and this particular investment represents 25% of the fund's portfolio. The fund has qtrly liquidity with no lockups. Oh yeah, the micro cap stock is up 70% YTD.

Should this investment be in a side pocket? It sure looks like an illiquid investment eventhough you can get a public quote all day long. Problem is, if this manager tried to exit the position, the stock would tank, not to mention how long it would take to monetize it given the low daily trading volume and public float. Looking at both sides, one could argue that you will give up liquidity by side-pocketing the investment and that paying an incentive fee on the micro cap's unrealized appreciation is well worth it since you can redeem on a qtrly basis.

I strongly believe it should be in a side-pocket, but I am interested in any other views.

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