In a settlement with the U.K.’s Financial Conduct Authority (FCA), European fund manager H2O AM LLP will pay €250 million to investors who have been stuck in a series of illiquid investment funds since 2020.
Between 2015 and 2019, H2O made a series of investments in private placements, both debt and equity, in early-stage companies connected with controversial German businessman Lars Windhorst and his company, Tennor Holding BV.
These investments, which were highly illiquid, were very different from most of the funds’ holdings, given that the funds were open-ended and offered daily redemptions.
When these unusual investments and the relationship with Windhorst were exposed by articles in the Financial Times, the funds faced hefty investor redemptions — with about €8 billion of their €34 billion in assets under management (AUM) redeemed in mid-2019.
In 2020, after the markets dropped sharply and the funds’ exposure to the illiquid investments rose, the firm was required by French regulator Autorité des marchés financiers (AMF) to suspend redemptions in several funds.
The firm later segregated the illiquid investments in “side-pocketed funds” worth an estimated €1.6 billion. These funds don’t allow redemptions. The firm’s other, more liquid assets were moved to open-ended funds.
The FCA noted that H2O has since written off most of the assets in the side-pocketed funds, and they remain suspended, preventing investors from accessing their investments.
According to the enforcement notice, €229 million has already been returned to investors in the suspended funds, and the firm has now voluntarily agreed to contribute another €250 million to buyback units from investors. It also waived its rights to €320 million worth of fees and investments in those funds, and will cancel its registration in the U.K. by the end of the year.
“This settlement reflects significant voluntary contributions and support, without admission of liability, from the H2O Group and its shareholders and, accordingly, will result in payments to [investors] significantly above what would be available from H2O LLP alone,” the settlement notice said.
The FCA said its investigation found that the firm violated several regulatory principles, including due diligence failings, not properly managing conflicts of interest — including employees use of Windhorst’s private jet and superyacht — and providing false statements to the FCA.
“H2O’s job was to manage its funds properly and protect investors. It failed to do this and, to make matters worse, it repeatedly provided misleading information to the FCA,” said Steve Smart, joint executive director of enforcement and market oversight, in a release.
“Through this settlement, the FCA has secured money for affected investors and agreement that H2O will stop operating regulated business in the U.K.,” he added.
Had the firm not agreed to the terms of the settlement, and had it not already been sanctioned by the French AMF, the FCA “would have imposed a substantial fine on H2O for its serious breaches,” it said.
In early 2023, the AMF fined the firm €75 million, fined its ex-CEO €15 million, banned him for five years, and fined another executive €3 million for alleged violations, including buying the unsuitable, illiquid investments for its funds.
H2O is currently appealing that ruling.
The firm’s settlement with the FCA also noted that H2O has beefed up its internal controls and compliance systems, and adopted a new governance model to prevent similar misconduct in the future.
“With this settlement, we acknowledge the FCA’s findings relating to investments in private securities undertaken by H2O AM LLP between 2015 and 2019 and take a major step forward,” said H2O CEO Loïc Guilloux in a release.
“Over the last few years, we have significantly improved and consolidated our organization and strengthened our risk management and compliance teams, governance and internal procedures. These changes ensure that lessons from this period are embedded in our corporate culture,” he said.
“Today, this settlement enables us to provide a concrete and swift solution to all our unitholders and to look to the future, whilst remaining focused on our clients’ interests and meeting their needs,” he said.