Dear Limited Partner:
The year-end withdrawal notification deadline passed on November 17, 2008 for Farallon Capital Institutional Partners, L.P. (the "Partnership"). Like many funds, the Partnership has received an unusually high volume of withdrawal requests for the upcoming withdrawal date of December 31, 2008 (the "Withdrawal Date").
The Partnership currently has significant cash holdings. A portion of this cash will be distributed to a trust and used to meet withdrawals as described below, but the Partnership also requires cash for its investment program, including to purchase new securities and instruments, meet outstanding investment commitments and meet potential additional collateral obligations to financial counterparties. Distributing substantially all of this cash to the withdrawing Partners would limit the liquidity of the Partnership and its flexibility to take advantage of new investments at a time when we believe there are severe market dislocations and excellent investment opportunities.
Furthermore, approximately 31% of the Partnership's capital, excluding investments in Special Situation Accounts currently is attributable to debt instruments, such as bank loans, held outside of Special Situation Accounts. Credit markets have become substantially less liquid, and there are relatively few transactions in many types of debt instruments at this time. The spread between quoted bid and ask prices has widened considerably for many of these instruments.
Distributing cash only to withdrawing Partners would have the effect of concentrating the Partnership's investment portfolio, and the interests of its non-withdrawing Partners, in these assets. Pursuant to the Partnership's valuation policies, such concentration generally would take place at the average of the bid and ask prices on December 31, 2008, which could result in less favorable terms for the Partnership than might be obtained in open market transactions. The liquidity characteristics of the resulting portfolio would not be in line with furthering the Partnership's investment program. Addressing these concerns by selling substantial quantities of these assets before year-end may not be feasible and could result in "fire-sale" pricing.
Section 5.5(b) of the Sixth Amended and Restated Limited Partnership Agreement of the Partnership, effective as of April 1, 2004 (as amended, the "Partnership Agreement") provides that if Limited Partners elect to withdraw more than 25% of the Partnership's capital (exclusive of capital in Special Situation Accounts) on any withdrawal date, Farallon Partners, L.L.C. (the "General Partner") may, in its sole discretion, elect to make such distribution by distributing to a liquidating trust (the "Trust"), administered by the General Partner as trustee (in such capacity, the "Trustee"), assets and liabilities equal in net value as of the Withdrawal Date to the Partnership's capital being withdrawn. Securities and instruments held in Special Situation Accounts and Remaining Obligations will not be assigned to the Trust and any reserves will reduce amounts assigned to the Trust. The Trust is to be administered for the sole benefit of the withdrawing Partners, who will be the beneficiaries of the Trust (the "Beneficiaries"). Capitalized terms used but not otherwise defined herein, are used as defined in the Partnership Agreement.
The purpose of this letter is to notify you that the withdrawal requests received by the Partnership for the Withdrawal Date exceed 25% of the Partnership's capital (exclusive of capital in Special Situation Accounts), and that the General Partner has elected to establish and make distributions with respect to the withdrawing Partners to the Trust. The General Partner's decision is made in an effort to balance the interests of the withdrawing Partners with the interests of the remaining Partners.
If a Limited Partner has requested a full withdrawal from the Partnership, as a Beneficiary it will have an undivided proportionate interest in the Trust's capital based on its Capital Account value on the Withdrawal Date excluding Special Situation Accounts, Remaining Obligations and reserves divided by the aggregate value of the capital contributed to the Trust. If a Limited Partner has requested a partial withdrawal of its Capital Account, as a Beneficiary it will have an undivided proportionate interest in the Trust's capital based on its requested withdrawal amount on the Withdrawal Date divided by the aggregate value of the capital contributed to the Trust; provided, that if such withdrawal amount exceeds such Limited Partner's Capital Account value on the Withdrawal Date, excluding Special Situation Accounts, Remaining Obligations and reserves, such Limited Partner will be required to withdraw from the Partnership and its interest in the Trust will be calculated as provided in the previous sentence.
In accordance with the provisions of Section 5.5(b) of the Partnership Agreement, the Trustee will use all reasonable efforts to reduce the assets transferred to the Trust to cash and to promptly distribute such cash to the Beneficiaries, with the objective of completing such liquidation within one year of the Withdrawal Date. However, there can be no assurance that the liquidation of the Trust's assets will be completed within such one-year period, and the Trustee will probably find it prudent to retain some cash in the Trust as reserves for future liabilities beyond such one-year period. In addition to distributions in cash, the Trust may also make distributions in kind, in the sole discretion of the Trustee.
The Trustee intends to make an initial cash distribution to the Beneficiaries during the month of January 2009 from the Trust. Preliminary estimates of this initial cash distribution available to each Beneficiary will be made available upon request.
No management fees or incentive fees are payable to the Trustee or the Management Company with respect to the assets held in the Trust, although the Trust will pay for its costs and expenses, including the costs of legal advisors, accountants, consultants, investment bankers, experts, other advisors, brokers and other agents.
Your interests as Beneficiary in the Trust will not be represented by trust certificates. You may not transfer or pledge your interests in the Trust (or any portion thereof) without the prior written consent of the Trustee, which may be withheld in its sole discretion. In addition, you will have no right to withdraw from the Trust.
A copy of the trust agreement for the Trust will be made available upon request made to the General Partner. If you have submitted a withdrawal request for the Withdrawal Date and now wish to revoke your withdrawal request, in whole or in part, in light of these developments, you should notify the General Partner promptly and in any case by December 15, 2008. Revocations of withdrawal requests may be honored by the Partnership, in whole or in part, at the sole discretion of the General Partner. The General Partner will inform you whether or not your revocation has been accepted in writing reasonably promptly following December 15, 2008.
We recognize that utilization of the Trust may be inconvenient for many of you. Please be assured that we are taking these steps only after carefully considering the alternatives and concluding that this is the best way to balance the interests of the withdrawing Partners with the interests of the remaining Partners. Thank you in advance for your patience and understanding during these unprecedented times.