Note 1. Organization
Pine Grove Alternative Institutional Fund (the “Fund”) is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed end management investment company (the “Trust”), formed on June 21, 2013. Prior to being closed to subscriptions and beginning the process of liquidation (as discussed below), the Fund offered on a continuous basis up to 200,000 shares of beneficial interest at net asset value per share of Class I Shares and Class A Shares (collectively, “Fund Shares”). Class A Shares are subject to a sales load of up to 3% of the investor’s subscription. The Fund’s investment objective is to seek long-term capital appreciation. The Fund commenced operations on January 1, 2014, after it acquired the net assets of Pine Grove Institutional Partners II Ltd. (the “Partnership”). Class A Shares commenced operations on October 1, 2016. On May 11, 2016 the Board of Trustees of Pine Grove Alternative Fund approved a plan of liquidation and dissolution (the “Plan”). Pursuant to the Plan, Pine Grove Alternative Fund’s Class I Shares were exchanged for an equivalent value of Class A Shares (the “Exchange”) of the Fund on October 1, 2016.
The investment adviser of the Fund is FRM Investment Management (USA) LLC (the “Investment Adviser”), a registered investment adviser with the U.S. Securities Exchange Commission (“SEC”) and a registered commodity pool operator with the Commodity Futures Trading Commission (“CFTC”). The Board of Trustees (the “Board” and each member a “Trustee”) of the Fund supervises the conduct of the Fund’s affairs and pursuant to an investment advisory agreement, has engaged the Investment Adviser to manage the Fund’s day-to-day investment activities.
On July 30, 2018, the Fund’s Board, upon the recommendation of the Investment Adviser, and upon careful consideration, approved a proposal to liquidate the Fund pursuant to the terms of its plan of liquidation (the “Plan of Liquidation”). Pursuant to the Plan of Liquidation, substantially all of the assets of the Fund will be liquidated, known liabilities of the Fund will be satisfied, and the remaining proceeds will be distributed to the Fund’s shareholders.
The liquidation schedule is anticipated to be as follows:
| Timing of Payments to Shareholders | | Approximate Percentage of Net Asset Value |
| Q4 2018 | | Up to 10% |
| Q1 2019 | | Up to 45% |
| Q3 2019 | | Up to 40% |
| Q2 2020 | | Up to 5% |
The Fund will be dissolved as soon as reasonably practicable following the liquidation. The Fund was closed to any subscriptions as of July 31, 2018 and will not make any further tender offers to repurchase Fund’s Class A or Class I Shares. Shareholders will not be required to submit any written tender documentation in connection with the liquidation. Following the closure of the Fund to subscriptions, the Investment Adviser will engage in business and activities for the purposes of winding down the Fund’s business affairs and transitioning its portfolio to cash and cash equivalents in preparation for the orderly liquidation and subsequent distribution of its assets. In preparing for the liquidation and the process of transitioning its portfolio, the Fund will no longer be pursuing its investment objective or be managed consistent with its investment strategies as stated in the Prospectus. This is likely to impact performance. Pending the Fund’s final distribution, the Fund may remain invested in certain Private Investment Funds, which means that certain of the Fund’s assets will still be exposed to the risks of the Fund’s investment program. In addition, the liquidation may result in various federal, state, local and/or foreign tax consequences for shareholders of the Fund. Shareholders should consult with their respective tax advisers for information regarding all tax consequences of their investment in the Fund.
Dates and amounts set forth in the Plan of Liquidation, including those in the liquidation schedule above, may be changed without notice to shareholders, at the discretion of the Board or the Fund’s officers.
Upon the distribution of all of the Fund’s assets, the Fund intends promptly to deregister under the Investment Company Act of 1940, as amended, and dissolve under Delaware law.
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
Note 2. Summary of Significant Accounting Policies
These financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of increase and decrease in net assets from operations during the fiscal period. Actual amounts could differ from those estimates. The following summarizes the significant accounting policies of the Fund:
Security Valuation – The valuation of the Fund’s investments is reviewed monthly by the valuation committee (“Valuation Committee”). The value of the Fund’s net assets is determined as of the close of the Fund’s business at the end of each month. The Board has approved procedures pursuant to which the Fund values its investments in private investment funds (commonly referred to as hedge funds) (“Private Investment Funds”) at fair value, which ordinarily will be the value provided to the Fund by the Private Investment Funds’ administrators or investment managers from time to time, usually monthly. In accordance with these procedures, fair value as of each month-end ordinarily will be the value determined as of such month-end for each Investment Fund in accordance with the Private Investment Fund’s valuation policies and reported at the time of the Fund’s valuation. Because most Private Investment Funds’ administrators or investment managers will provide the Fund with their determinations of the month-end net asset value of their Private Investment Funds after the relevant month-end, the Fund expects to calculate its month-end net asset value and net asset value per share within 30 calendar days following the relevant month-end. In the event that a Private Investment Fund does not report a month-end value to the Fund on a timely basis, the Fund would determine the fair value of such Private Investment Fund based on the most recent final or estimated value reported by the Private Investment Fund, as well as any other relevant information available at the time the Fund values its portfolio.
The Fund accounts for its investments in Private Investment Funds in accordance with relevant authoritative guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The Fund’s investments in Private Investment Funds are reflected in the Statement of Assets and Liabilities at fair value, with changes in unrealized gains (losses) resulting from changes in fair value reflected on the Statement of Operations as “Net change in unrealized appreciation of investments.” Fair value is the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants (i.e., the exit price).
Relevant authoritative guidance permits the Fund, as a practical expedient, to measure the fair value of its total investments on the basis of the net asset value per share of such investments (or the equivalent) if the net asset value per share of such investments (or the equivalent) is calculated in a manner consistent with the measurement principles of applicable authoritative guidance as of the Fund’s reporting date. The fair value of the Fund’s Private Investment Funds is based on the information provided by such Private Investment Funds’ management, which reflects the Fund’s share of the fair value of the net assets of such Private Investment Funds (i.e., the practical expedient is used). If the Valuation Committee determines, based on its own due diligence and investment valuation procedures, that alternative valuation techniques are more appropriate for any of the Fund’s investments in Private Investment Funds, such investments may be fair valued by the Valuation Committee using other suitable sources. The Valuation Committee used alternative sources to value $105,853 of Private Investment Funds during the year ended March 31, 2019.
For investments other than Private Investment Funds and Mutual Funds for which the practical expedient is used for valuation, the Fund uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value hierarchy gives
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 – Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that the Fund has the ability to access at the measurement date;
Level 2 – Quoted prices which are not considered to be active, or inputs that are observable (either directly or indirectly) for substantially the full term of the asset or liability; and
Level 3 – Prices, inputs or modeling techniques which are both significant to the fair value measurement and unobservable (supported by little or no market activity).
As of March 31, 2019, all investments were valued using the practical expedient, except for King Street Capital, Ltd., which was valued as a Level 2 investment. The total value of Level 2 investments is $105,853.
There were no transfers in or out of Level 3 for the year ended March 31, 2019.
There are no redemption restrictions with regards to the Private Investment Funds’ holdings.
Investment Transactions, Investment Income and Realized and Unrealized Gain and Loss – Investment transactions are accounted for on a trade date basis. Income and expenses, including interest, are recorded on an accrual basis. Dividend income is recorded on the ex-dividend date.
The net realized gain or losses from investments in Private Investment Funds are recorded when the Fund redeems or partially redeems its interest in the Private Investment Funds or receives distributions in excess of return of capital. Realized gains and losses from redemptions of investments are calculated using the identified cost of investments sold.
Distributions to Shareholders – Distributions to shareholders of net investment income and net capital gains, if any, are declared and paid at least annually. Distributions paid by the Fund will be reinvested in additional shares of the Fund unless a shareholder elects not to reinvest its shares. Distributions are based on amounts calculated in accordance with applicable federal income tax regulations, which may differ from GAAP. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund.
Federal Taxes – The Fund’s tax year is October 31, 2018. The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute all of its taxable income to shareholders. In addition, by distributing in each calendar year substantially all its net investment income and capital gains, if any, the Fund will not be subject to a Federal excise tax. Therefore, no Federal income or excise tax provision is required. The Fund recognizes interest and penalties, if any, related to unrecognized tax positions as income tax expense in the statement of operations. During the year, the Fund did not incur any interest or penalties.
The Fund is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authorities. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2019 that would require recognition, de-recognition or disclosure. The Fund does not expect that its assessment regarding unrecognized tax benefits will materially change over the next twelve months. However, the Fund’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, compliance with U.S. federal, U.S. state and foreign tax laws, and
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
changes in the administrative practices and precedents of the relevant taxing authorities. Generally, the Fund is subject to income tax examinations by taxing authorities for the period since its inception.
Commitments and Contingencies – In the normal course of business, the Fund enters into contracts that provide general indemnifications by the Fund to the counterparty to the contract. The Fund’s maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated; however, based on experience, the risk of loss from such claims is considered remote.
Note 3. Risks
An investment in the Fund should be considered a speculative investment that entails a high degree of risk. It is possible that an investor may lose some or all of its investment and that the Fund may not achieve its investment objective. The Fund is classified as non-diversified and may invest a significant portion of its assets in Private Investment Funds and the Fund may be susceptible to the economic and regulatory factors affecting these Private Investment Funds and/or the fund industry.
The Private Investment Funds invest in a variety of different assets and employ a number of different strategies which in turn subject their investors, including the Fund, to certain risks including those associated with: (1) investing in equities, fixed income securities, convertible securities, derivatives, commodities, mortgage-backed securities, currencies and foreign securities; (2) participating in short sale transactions; and (3) employing arbitrage and leverage. The Fund may also implement leverage and invest directly in derivatives which will directly expose the Fund to the risks associated with the employment of leverage and investments in derivatives.
The Fund may make additional investments and effect withdrawals from the Private Investment Funds only at certain specific times and may not be able to withdraw its investment in a Private Investment Fund promptly after it has made a decision to do so. This may result in a loss to the Fund and adversely affect its investment return. The Fund's inability to withdraw an investment in a Private Investment Fund may also prevent the Fund from making an offer to repurchase shares. Fund shareholders do not have the right to require the Fund to redeem or repurchase its shares and may not have access to the money they invested for an indefinite period of time. Repurchases will be made at such times, and in such amounts, and on such terms as may be determined by the Board, in its sole discretion.
The shares are not, and are not expected to be, listed for trading on any securities exchange and, to the Fund’s knowledge, there is no, nor will there be, a secondary trading market for the shares. Shares are subject to substantial restrictions on transferability and resale, and may not be transferred or resold except as permitted under the Fund’s Agreement and Declaration of Trust, as may be amended or amended and restated from time to time. A shareholder should not expect to be able to sell its shares regardless of how the Fund performs. Because a shareholder may be unable to sell its shares, the shareholder will be unable to reduce its exposure on any market downturn.
Note 4. Management Fees and Other Expenses
Management Fees – The Investment Adviser receives a fee, accrued monthly and paid quarterly in arrears, of 0.225% (0.90% on an annualized basis) of the Fund’s month-end net asset value. Effective August 1, 2018, the Investment Adviser agreed to waive its management fee for the duration of the liquidation process until the Fund is dissolved under Delaware law. For the year ended March 31, 2019, the Investment Adviser waived management fees totaling $248,585.
Shareholder Servicing Fees – The Fund pays Atlantic Fund Administration, LLC (d/b/a Atlantic Fund Services) (“Atlantic”) and Atlantic pays each broker-dealer that is a member of the Financial Industry Regulatory Authority (“FINRA”) that has entered into a shareholder servicing agreement with Atlantic (collectively, “Service Agents”), a monthly shareholder servicing fee of 0.070833% (0.85% on an annualized basis) of the net asset value of the outstanding shares attributable to the clients of the Service
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
Agents who are invested in the Class A Shares through the Service Agents. The shareholder servicing fees expense for the year ended March 31, 2019 was $34,848.
Expenses Reimbursed by Investment Adviser –The Investment Adviser has agreed to waive and/or reimburse the Fund’s other expenses (excluding extraordinary expenses, any shareholder servicing fees and the following investment related expenses: foreign country tax expense and interest expense on amounts borrowed by the Fund) to the extent necessary in order to cap the Fund’s other expenses at 0.60% through August 1, 2018. For the year ended March 31, 2019, the Investment Adviser reimbursed expenses of $141,409.
For a period of five years subsequent to the Fund’s commencement of operations, or from the commencement of operations of each new share class of shares thereof, the Fund may repay the Investment Adviser for fees waived and expenses reimbursed pursuant to the expense cap if such payment (1) is made within three years of the fee waiver or expense reimbursement (2) is approved by the Board and (3) does not cause the net annual operating expenses of the Fund to exceed the expense cap in place at the time the fees were repaid. As of March 31, 2019, $887,920 is subject to recoupment by the Investment Adviser.
Distribution – Prior to November 9, 2018, Foreside Fund Services, LLC served as the Fund’s distributor and was not and is not affiliated with the Investment Adviser or with Atlantic or their affiliates. Effective November 9, 2018, the Fund no longer requires the services of a distributor as it is no longer offering shares.
Custodian – J.P. Morgan Chase Bank, N.A. (the “Custodian”) serves as the Fund’s independent custodian of its investments in underlying private investment companies. The Fund is subject to credit risk to the extent any custodian with which it conducts business is unable to fulfill contractual obligations on its behalf. The Fund’s management monitors the financial condition of such custodians and does not anticipate any losses from the Custodian.
Administrator – Atlantic provides fund accounting, fund administration, and transfer agency services to the Fund. The Fund pays Atlantic a fee for its services (collectively, “Fund Services Fees”) as provided in the administrative agreement.
Trustees and Officers – The Fund pays the Trustees, who are not “interested persons” (as defined in the 1940 Act) of the Fund (the “Independent Trustees”), each an annual retainer fee of $30,000 for service to the Fund. Each Independent Trustee is also reimbursed for all reasonable out-of-pocket expenses incurred in connection with their duties as an Independent Trustee, including travel and related expenses incurred in attending Board meetings. No officer of the Fund is compensated by the Fund.
Note 5. Security Transactions
The cost of purchases and proceeds from sales of investments (including maturities), other than short-term investments during the year ended March 31, 2019, were $1,883,901 and $52,432,886 respectively.
Note 6. Line of Credit
Effective September 28, 2018, the Fund closed a committed $4 million secured line of credit agreement with Societe Generale. During the period, the Fund temporarily borrowed from the line of credit to address timing mismatches between the inflows of funds to and outflows of funds from the Fund in connection with (i) subscriptions and redemptions by investors of the Fund; (ii) subscriptions and redemptions by the Fund in Portfolio Funds; and (iii) payments in the ordinary course of business of fees, expenses and other obligations of the Fund. Interest was charged to the Fund based on its borrowings at an amount above the LIBOR rate. The line of credit was secured by the Fund’s cash and investment securities. The Fund was required to pay a commitment fee at a rate of 0.50% per annum on the unused portion of the line of credit. The average borrowings and average interest rate (based on days with outstanding balances) for the year ended March 31, 2019, were $5,423 and 3.46%, respectively.
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
Note 7. Federal Income TaxDistributions during the tax year as noted were characterized as follows:
| | | Ordinary Income | |
| October 31, 2018 | | $ | 2,600,000 | |
| October 31, 2017 | | | 2,200,000 | |
As of October 31, 2018, the components of distributable earnings were as follows:
| Undistributed ordinary income | | $ | 373,524 | |
| Capital and other losses | | | (5,146,219 | ) |
| Unrealized appreciation | | | 1,002,039 | |
| Total | | $ | (3,770,656 | ) |
The components of distributable earnings on a tax basis may differ from those reported for financial statement purposes. To the extent these differences are permanent, such amounts are reclassified within the capital accounts based on their federal tax treatment.
Accordingly the following permanent differences, primarily due to tax adjustments related to passive foreign investment companies, partnerships and amortization of organization costs, have been reclassified with the capital accounts during the tax year ended October 31, 2018. These reclassifications have no effect on net assets.
| Paid-in-Capital | | | Total Distributable Loss | |
| $ | 1,401 | | | $ | (1,401 | ) |
As of March 31, 2019, the cost of investments is $15,094,746 for federal income tax purposes. The related net unrealized depreciation consists of the following:
| Gross Unrealized Appreciation | | $ | 53,083 | |
| Gross Unrealized Depreciation | | | (2,923,262 | ) |
| Net Unrealized Appreciation | | $ | (2,870,179 | ) |
As of October 31, 2018, the Fund has $2,326,290 of available short-term capital loss carryforwards and $2,819,929 of available long-term capital loss carryforwards that have no expiration date.
Note 8. Recent Accounting Pronouncements and Securities and Exchange Commission Updates
In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify the disclosure requirements in Topic 820 of the disclosure framework. The modifications include the removal to disclose the amount of and reason for transfers between Level I and Level II of the fair value hierarchy, the policy for timing of transfers between levels, the valuation processes for Level III fair value measurements, and the changes in unrealized gains and losses for the period included in earnings for recurring Level III fair value measurements held at the end of the reporting period. Also, in lieu of a roll forward for Level III fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level III of the fair value hierarchy and purchases and issues of Level III assets and liabilities. Additionally, for investments for certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemptions might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. ASU 2018-13 is effective for fiscal years beginning December 15, 2019 with early adoption permitted to any removed or modified disclosures of this update. The Fund has adopted ASU 2018-13 within these financial statements.
In September 2018, the Securities and Exchange Commission released Final Rule 33-10532 captioned “Disclosure Update and Simplification,” which includes: (i) an amendment to require presentation of the total, rather than the components, of distributable earnings on the Statement of Assets and Liabilities; and (ii) an amendment to require presentation of the total, rather than the components, of distributions to
Pine Grove Alternative Institutional FundNotes to Financial Statements
March 31, 2019
shareholders, except for tax return of capital distributions, on the Statement of Changes in Net Assets. The amendments also removed the requirement for parenthetical disclosure of undistributed net investment income on the Statement of Changes in Net Assets. These changes were effective November 5, 2018. These amendments are reflected in the Fund’s financial statements for the year ended March 31, 2019.
Note 9. Subsequent Events
The Fund has evaluated all subsequent events through May 29, 2019, the date that these financial statements were issued. The Fund made liquidation payments of $14,991,891, which are included on the Statement of Assets and Liabilities as Liquidation of shares payable, on April 30, 2019.
