March 1, 2011 / 4:37 PM / 9 years ago

Falcone allows 'direct investments' in LightSquared

* Harbinger’s Falcone restructures LightSquared holding

* Fund issues a new class of shares for the telecom

* Shares could make direct investments easier

By Matthew Goldstein and Svea Herbst-Bayliss

NEW YORK/BOSTON, March 1 (Reuters) - Billionaire trader Philip Falcone is restructuring his hedge fund’s multibillion-dollar investment in LightSquared to make it easier to make “direct investments” in the upstart wireless telecommunications company.

Falcone announced the restructuring on Friday in an email to his Harbinger Capital Partner investors. The email, which Reuters obtained, said the plan “will facilitate direct investments by existing and prospective investors in the master fund’s holdings in LightSquared and the management of such holdings.”

Reston, Virginia-based LightSquared is the centerpiece of Falcone’s ambitious plan to build a high-speed broadband network that will sell wholesale wireless service to major telecom carriers. Falcone’s hedge fund, which has sunk about $3 billion into LightSquared, is the sole owner of the fledgling telecom that plans to compete with Clearwire CLWR.O, Verizon (VZ.N) and AT&T (T.N).

Over the past year, Harbinger investors have grown increasingly uneasy with the LightSquared investment, which accounts for nearly half of the $6 billion in assets managed by Falcone.

Investors are concerned that it could take years for LightSquared to generate significant revenue and that, with so much money committed to the telecom venture, Harbinger might find it difficult to honor redemption requests.

Indeed, Harbinger’s investments in stocks have steadily declined as the manager sold positions to free up cash. In recent months, it has sold big stakes in British satellite operator Inmarsat ISA.L and New York Times Co (NYT.N).

The hedge fund reported holding $1.6 billion worth of U.S. stocks as of Dec. 31, down from slightly above $2 billion on June 30.

Harbinger’s flagship fund ended 2010 down about 12 percent, investors familiar with the numbers said. By contrast, the average hedge fund rose 10 percent last year.

Falcone’s email offered few details on the LightSquared restructuring, which will create a new class of shares to hold Harbinger’s equity stake in the telecom. A Harbinger spokesman declined to comment on the email.

Telecom analysts say LightSquared, which has secured about $1.3 billion in short-term financing from UBS UBSN.VX and JPMorgan Chase (JPM.N), still needs to raise at least another $5 billion to build out its network and meet the U.S. Federal Communications Commission’s goal of making wireless Internet available to 238 million U.S. citizens by the end of 2015.

In August, Falcone circulated marketing materials to raise money for a dedicated LightSquared fund called the Harbinger Wireless Fund. It is not clear whether the fund, which has an investment minimum of $25 million, gained any traction.

The restructuring of Harbinger’s LightSquared investment comes a few weeks after the hedge fund received redemption requests from a number of high-profile investors, including a Blackstone Group (BX.N) investment fund, the asset management group of Goldman Sachs Group (GS.N) and the New York State Common Retirement Fund.

The restructuring may make it easier for Falcone to manage some of those redemption requests. Instead of doling out lots of cash, he could give investors a combination of dollars and an interest in the new class of LightSquared shares, people familiar with the hedge fund said.

Meanwhile, Falcone is looking for other ways to raise money for his hedge fund.

Harbinger recently sold the rights to a $142 million claim arising from the Lehman Brothers bankruptcy to Merrill Lynch Credit Products, a division of Bank of America (BAC.N), according to a document on file with the New York State Department of Corporations and a person familiar with the hedge fund. The sale price for the claims wasn’t disclosed.

Harbinger was one of many hedge funds that did business with Lehman and found some of its assets frozen when the Wall Street investment bank collapsed in September 2008. (Reported by Matthew Goldstein and Svea Herbst-Bayliss; Editing by Lisa Von Ahn)

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