Investing in Glacial Energy Holdings Inc should have been a disaster.
Starting around 2010, hedge fund manager Platinum Partners lent the reseller of electricity and natural gas tens of millions of dollars, and then took at least a 20 percent equity stake in the fast-growing company.
Then, trouble started. By 2013, Texas utility regulators had fined Glacial $100,000 for overbilling customers and not disclosing that founder and Chief Executive Officer Gary Mole's previous energy venture had collapsed. Mole was forced to resign from the company's Texas subsidiary.
Mole and his company were also targeted by former employees and a onetime partner in at least 10 lawsuits from 2009 to 2014, alleging, among other things, embezzlement, a hostile work environment, underpayment, and racketeering. Glacial beat back most of the legal challenges, but as debt mounted, the energy retailer filed for bankruptcy in 2014, listing more than $1 billion in unpaid obligations.
Platinum's ownership stake in the company wasn't worth much, according to a person familiar with Platinum's history. But the firm had earned as much as $20 million in interest on its Glacial loans, which carried annual rates as high as 22 percent.
Then, Platinum delivered the master stroke, snapping up Glacial's assets out of bankruptcy for about $53 million. Since then, Agera Energy LLC, the Platinum-backed company that inherited Glacial's customers, has quintupled in value, according to the person familiar with the hedge fund firm.
Turning painful situations into profit is the peculiar genius of Platinum founder Mark Nordlicht. The linchpin of his success: the increasingly popular strategy known as asset-based lending. The idea is to provide high-interest loans to companies other lenders shun and, if the company runs out of cash, take ownership and ultimately flip it for a profit.
With that approach, combined with more traditional investment strategies, Nordlicht has generated spectacular results. Platinum's approximately $720 million Value Arbitrage fund has generated average annual returns of about 17 percent since 2003, according to Platinum performance data reviewed by Reuters. The flagship fund's investments are about evenly divided between private debt and shorter-term investments in stocks and other securities. The roughly $540 million Credit Opportunities fund, which focuses on debt, has averaged annual gains of 13.4 percent since 2005, making money every month but one. Neither has ever posted a decline for a calendar year.
Last year, hedge funds overall dropped an average of about 1 percent. Platinum's Value Arbitrage fund, meanwhile, gained 9.4 percent, far ahead of its sector average of 2.46 percent. The Credit Opportunities fund gained 9.8 percent, trouncing a benchmark credit-fund gain of 0.07 percent.
And yet Platinum, with about $1.35 billion under management, remains relatively small next to other high-performance hedge fund firms.