Institutional investors in TCW Asset Management's distressed mortgage limited partnership funds will decide over the next two weeks whether to exit the funds or accept a new management team.
Los Angeles-based TCW gave investors in its Special Mortgage Credits Fund I and II until Feb. 19 to decide whether to remain in the mortgage-backed securities funds or liquidate their investments.
Their decision could be a signal of TCW's ability to keep institutions as investors after the termination of Jeffrey E. Gundlach, the former chief investment officer for fixed income.
The Dec. 4 termination of Mr. Gundlach triggered the limited partnership funds' key-man provision. Mr. Gundlach and his team managed both institutional-only funds with a combined $3 billion.
Later that month, Mr. Gundlach formed his company, DoubleLine Capital LP, Los Angeles, with members of his former TCW team.
TCW was required by the terms of the partnerships' documents to select a new manager within 90 days after Mr. Gundlach's departure. The funds will be invested by specialist mortgage portfolio managers from TCW and Los Angeles-based Metropolitan West Asset Management, which TCW is in the process of acquiring, according to a Jan. 25 letter obtained by Pensions & Investments. The letter was sent by TCW to the more than 200 limited partners.
TCW is offering big fee concessions to investors that decide to remain. The management fee will be reduced to 1% from 2% and the performance fee to 5% from 20% for the remaining term of the funds, which have a private-equitylike structure.
TCW's client letter reminded investors that the MBS funds' agreements permit TCW to manage the fund for its entire term — until July 2015 — after a “key person event.”
TCW spokeswoman Erin Freeman said in an e-mail response to a request for comment about the fund changes: “We have been engaged in an extensive dialogue with the limited partners of SMCF I and II funds. This dialogue has led us to propose amended terms that will offer investors significant flexibility and enhanced terms. We have great confidence in the new investment team.”
In addition to the liquidation option, TCW offered investors two ways to remain in the funds. Both featured reduced fees, shortened investment terms and the ability to liquidate after 18 months. The first option allows the funds' managers to make new investments; the second option does not.
According to the letter, the reduced fee schedule also applies to the total liquidation option. In the letter, TCW said it expected “to liquidate this portfolio within a month after the option becomes effective, subject to market conditions, but in any event, within six months.”