UBS Group AG has revealed its plans to wind down several investment funds that are managed by its hedge fund division, O’Connor. This decision comes on the heels of substantial losses linked to the bankruptcy of First Brands Group, a U.S. auto-parts supplier. The Swiss banking giant is taking this step to manage the repercussions and safeguard investor confidence, especially as worries grow about exposure in the private credit and invoice-financing markets.
The vehicles affected, such as O’Connor’s Working Capital Opportunistic Fund and a related high-grade financing fund, will be gradually wound down, with most assets anticipated to be sold off by the end of 2025. This decision comes after a thorough review of the portfolio’s exposure to First Brands, which filed for Chapter 11 bankruptcy earlier this year due to serious financial irregularities, revealing liabilities estimated at around $10 billion.
UBS’s exposure to First Brands through the O’Connor funds is reported to be over $500 million. In fact, one of the funds has about a third of its holdings linked to First Brands, with roughly 9% in direct invoice financing and the rest tied indirectly through receivables from the company’s customers. Even with such significant exposure, UBS has emphasized that it doesn’t carry any on-balance-sheet risk related to the bankrupt auto supplier, as all impacted assets are contained within client investment pools.
Mounting Pressure and Investor Redemptions
The decision to liquidate comes at a tough moment for UBS, as they are in the process of selling their O’Connor hedge fund unit to the U.S. brokerage firm Cantor Fitzgerald. The unexpected downfall of First Brands has thrown a wrench into the deal, prompting UBS to reassess which funds can be part of the sale and which ones need to be left out because of possible liabilities.
Investor withdrawals have picked up pace in recent weeks as the First Brands situation has unfolded, leading UBS to act quickly to safeguard client value and rebuild market confidence. According to sources close to the situation, the bank anticipates recovering about 70% of the funds’ net asset value by the end of the year, contingent on the outcomes of bankruptcy proceedings and asset recoveries.
Strategic Containment and Reputational Stakes
For UBS, the liquidation is a strategic move to contain the fallout and stop it from affecting its wider asset management operations. The bank has made it clear that it’s dedicated to a “orderly and transparent” liquidation process, collaborating closely with investors to ensure the best possible recovery outcomes during the bankruptcy proceedings.
The episode has prompted O’Connor to take a closer look at its risk management practices, especially in the realm of invoice-backed lending. Industry experts point out that this situation highlights the weaknesses in private-credit strategies that depend heavily on trade receivables assets that can often be unclear, hard to sell, and tricky to assess when counterparties fail to meet their obligations.
Market Implications and the Road Ahead
The bankruptcy of First Brands has created quite a stir in the alternative-lending market, where many asset managers found themselves similarly exposed due to intricate financing arrangements. UBS’s decision to liquidate the O’Connor funds is viewed as a proactive step to contain the situation before it potentially impacts other areas of its investment operations.
While UBS’s balance sheet is in a solid position and not facing direct losses, the reputational fallout could stick around for a while. This incident has sparked concerns about the level of due diligence and transparency in specialized credit funds, especially as investors are becoming increasingly wary of unclear financing models.