Canyon Capital departures get mixed reaction from investors

In the last two weeks, Canyon Capital Realty Advisors has lost three top executives, triggering key-man provisions giving investors the ability to take control of the manager's investment funds.

Canyon Capital founders “removed” co-founder, CEO and Chairman K. Robert “Bobby” Turner, according to a letter to investors. Daniel Millman, principal and Mr. Turner's second in command, quit shortly thereafter, along with Bari Sherman, general counsel.

“After extensive consideration regarding the future of the CCRA business and its leadership, we determined that it is in the best interests of CCRA and its clients to remove Bobby Turner as managing partner and to restructure the management of the business and strengthen the alignment of our real estate expertise within Canyon,” wrote co-founders Joshua S. Friedman and Mitchell R. Julis.

Sources say Mr. Turner, also a co-founder, wanted to start his own firm to do social impact investing and negotiations over his separation didn't go well. Parent firm Canyon Capital Advisors' $20 billion hedge fund business dwarfs its $3 billion real estate business, and Canyon Capital executives wanted to integrate the real estate business.

Two managing directors — Quincy Allen and Neville Rhone Jr. — left the real estate arm of hedge fund manager Canyon Capital Advisors earlier this year to launch their own real estate investment firm, Arc Capital Partners.

Efforts to reach Messrs. Turner and Millman and Ms. Sherman were unsuccessful. Mr. Allen did not return calls seeking comment.

Mr. Rhone, in an e-mail, said, “In a nutshell, we have nothing but positive things to say about Canyon and our experience here.”

The departures are prompting real estate clients to wonder whether the firm can effectively continue the investment strategies and returns they have come to expect, sources said.

CCRA's returns have held their own. For example, as of March 31, the Canyon-Johnson Urban Fund III had a net internal rate of return of 16.4% since its 2008 inception, according to Ricardo Duran, spokesman for the $175.9 billion California State Teachers' Retirement System, West Sacramento, in an e-mail. CalSTRS' real estate benchmark is the NCREIF Property Index, which posted a return of 10.5% for the year ended June 30.

Canyon Capital Realty Advisors' new leadership insists that very little will change and, in fact, there will be some improvements. Co-founders Messrs. Friedman and Julis will be co-chairmen. Principal Jonathan Roth, a 16-year veteran, was promoted to president. Mr. Roth will lead the investment management and asset management teams.

CCRA will be integrated into Canyon Capital's hedge fund business and have broader access to firm capital and investors, Mr. Roth said. Before Mr. Turner left, the situation “was more difficult. It was more of a siloed environment.”

Still, he acknowledged he has had a lot of explaining to do with stunned investors.

Mr. Turner was fired after discussions concerning his desire to leave to form his own firm dissolved, said sources familiar with the situation.

“We grew on the real estate side and Bobby's focus turned to the social impact side,” said a person familiar with the situation. “At some point, discussions either go to a point where everyone leaves happy or they don't.”

Mr. Turner's termination “inspired Dan Millman and Bari Sherman to leave, both of whom were very close to Bobby and played a big part in Bobby's role in creating a social impact platform,” the person said.

At this point, many clients are considering their next steps, according to sources who wished to remain anonymous.

Their reactions vary, depending on in which Canyon Capital Realty funds and strategies they are invested. Clients in mature funds that are winding down — such as Canyon-Johnson Urban Fund III, which was launched in 2007 — are more sanguine than those that have invested recently, including the $277.3 billion California Public Employees' Retirement System, Sacramento.

Last year, CalPERS committed $200 million to Canyon for an emerging real estate manager strategy. Canyon Capital Realty also manages a $570 million office portfolio, CalSmart LLC, for CalPERS. Deutsche Bank's real estate unit formerly known as RREEF developed the portfolio; CalPERS officials terminated RREEF a couple of years ago, hiring Canyon.

CalPERS also invests in Canyon-Johnson Urban funds, a joint venture of Canyon Capital and former NBA star Earvin “Magic” Johnson. CalPERS, Mr. Johnson and CalSTRS are noted on SEC documents as significant investors in the Canyon-Johnson Urban Fund III.

Joe D'Anda, CalPERS spokes-man, said pension fund officials “are aware of the situation (at Canyon) and are monitoring it.”

For its part, CalSTRS hasn't made new commitments to Canyon Capital Realty since 2008, said spokesman Ricardo Duran in an e-mail. He declined to comment on the firm's personnel changes.

Another recent Canyon Capital Realty Advisors investor is the University of Michigan endowment, Ann Arbor, which has an $8.7 billion long-term portfolio. The university endowment's most recent investment with Canyon Capital Realty was last year, when it committed $100 million to its Discretionary Mortgage Investment Account IV, a separate account investing in real estate loans. The UM committed a total of $225 million to four prior Canyon Realty Advisors' funds, including the Canyon-Agassi Charter School Facilities Fund LP, formed with retired professional tennis player Andre Agassi.

So far, UM executives remain mum regarding their future plans.

Some investors were already winding down their relationship with the firm and have not reinvested.

As of this year, for example, the $160.7 billion New York State Common Retirement Fund, Albany, is no longer a Canyon Capital investor. It redeemed its investment in 2008 hedge fund Canyon Value Realization Fund that had $1.2 million remaining last year, while its limited partnership interest in CCRA fund Canyon-Johnson Urban Fund III is down to just $18,182, said Eric Sumberg, spokesman for state Comptroller Thomas DiNapoli, sole trustee of the pension fund.

Mr. Sumberg declined to say why the pension fund redeemed its interest in Canyon Capital's hedge fund. New York State Common had $1.4 million invested in the hedge fund last year in assets remaining that had not yet been liquidated.

The CCRA executive departures tripped key-man provisions in various funds, sources said, though firm officials declined to identify which funds. SEC documents show Mr. Turner as an executive of not just the real estate funds, but also some Canyon hedge funds, including the Canyon Opportunistic Credit Fund launched this year and the 2009 Canyon Special Opportunities Fund.

Also according to the SEC, Mr. Turner, along with Mr. Millman and Ms. Sherman, are key executives of a fund jointly managed by Canyon Capital Realty and Citigroup Inc Canyon Multifamily Impact Fund LLC, which invests in workforce housing in underserved communities. Scott Helfman, Citi spokesman, declined to comment. Mr. Roth, the realty arm's new president, said the SEC documents have “more to do with the ownership and licensing than day-to-day activities.”

Consultants, who declined to be identified, said there's not much investors in closed-end funds can do, especially in funds that are past their investment periods.

Key-man clauses in limited partnership agreements give investors the right to terminate a fund's investment period or appoint a new general partner to manage the fund in the event certain named firm partners leave or no longer devote a majority of their time to the management of the fund, according to definitions provided by Preqin, a London-based alternative investment research firm.