Washington Blade Parent in Receivership

Small Business Administration hits Avalon Equity Fund

The investment fund that owns the Washington Blade, the Southern Voice, Genre magazine and other gay publications has been forced into receivership by the federal Small Business Administration (SBA), which will sell the fund’s assets and distribute the proceeds to investors.

”As a consequence of defendant’s continuing violation… SBA is entitled to the injunctive relief… including the appointment of SBA as receiver of [the Avalon Equity Fund],” the SBA wrote in an August 2008 court filing, which was only recently found by Gay City News.

Avalon, which owns a stake in the company that publishes the New York Blade and HX, was licensed by the SBA as a small business investment company (SBIC) in 2000. Through 2007, it borrowed just over $38 million from the federal agency to invest in gay media properties and a range of other ventures.

As part of its contract with the SBA, Avalon was required to have private money or assets in the fund from sources, such as individual investors, that had a value equal to half the amount it borrowed from the SBA or just over $19 million.

In 2007, the SBA wrote Avalon that it had a ”condition of capital impairment” because the value of its private assets had fallen below the required level.

In its 2008 lawsuit seeking to force the receivership, the SBA wrote that the ”capital impairment” was 61 percent in August of 2007 and that it rose to over 134 percent by December of that year.

Capital impairment is a ”type of solvency test,” said Tom Morris, director of SBA’s Office of Liquidation. If a hypothetical SBIC borrowed $40 million from the SBA and was required to have $20 million in private capital, its capital impairment would be 50 percent if it reported realized and unrealized losses totaling $10 million, Morris said.

The percentages cited in the lawsuit suggest that Avalon had little or no capital left as private investors were pulling their money out, businesses owned by Avalon were losing money, assets in the fund lost value, or some combination of the three.

The SBA is legally barred from discussing Avalon’s finances. The fund and the businesses it owns are privately held and have no legal obligation to report on their finances other than to the SBA and, presumably, any private investors.

David W. Unger, an Avalon founder and managing partner, did not respond to a call seeking comment, and Benjamin E. Brandes, Avalon’s other founder and managing partner, told Gay City News he had little information.

”I’m no longer with Avalon and haven’t been for quite a while,” Brandes said, though he still has cash in Avalon. ”I still have money with the fund as well as other investors.”

Avalon is the majority owner in Window Media, which owns the Washington Blade, the Southern Voice, the South Florida Blade, and other gay publications. Avalon also owns Genre magazine.

Lynne Brown, publisher of the Washington Blade, referred calls to William Kapfer, who is listed at Window’s co-president, chief marketing officer, and Genre‘s publisher, on the company web site. He did not respond to a call.

Through its Unite Media business unit, Avalon owns a ”non-majority” share in HX Media, which publishes the New York Blade, HX, a weekly magazine, and produces expos, according to Matthew Bank, CEO of HX Media.

”I don’t really think there are any,” Bank said when asked what the consequences of the receivership would be for HX Media. ”Our partner is Unite Media. Unite Media owns a non-majority share of our company.”

Referring to Window Media, Bank said ”I am not a part of that corporation, so I don’t know what their deal is.”

The SBA will likely not disclose what Avalon assets are for sale, except to a qualified buyer, until September 2009.

”In terms of public information, at a point in time, SBA will file a report with the court,” Morris told Gay City News. ”We will list the assets at that time…. If we’ve sold something to date, we might file that with the court. Other than that, we really do not disclose the assets because it can be disadvantageous to the portfolio of assets.”

A typical receivership takes three-and-a-half years and, on average, and the SBA recovers 63 cents on the dollar for investors and taxpayers, though results can vary.

”There are instances where SBA gets all of its money back,” Morris said. ”It really does run the gamut from zero to everything.”

Given the current economic climate, the Avalon sale may take longer and recover less.

”I think it is fair to assume that liquidations will be a little bit slower and for a little bit less,” Morris said.

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