<!-- Swiftype Variables -->

'Unique opportunity'

PPIP report offers chance for direct comparison of money managers

051412 ross
Cashing out: Wilbur Ross said the market rally made March the right time to liquidate.

Most of the money managers participating in the government's PPIP effort earned double-digit net internal rates of return during the first few years of the program, a government report shows.

The Treasury Department report on the managers in the Legacy Securities Public-Private Investment Program offers a rare glimpse into private placements.

“This is a really unique opportunity for the pension world and investment community to see eight managers side by side in the same market at the same time buy (residential mortgage-backed securities) and (commercial MBS) assets and see how divergent the results are,” said Jonathan Lieberman, managing director, Angelo Gordon & Co., New York, a firm participating in the program.

The latest Treasury Department report, released April 19, comes as the first phase of the program is nearing its end. Under the program's rules, managers cannot continue to invest or reinvest the billions of dollars in their PPIP funds after three years, even though the funds can continue operation for up to eight years. Most of the funds were launched in the third quarter of 2009.

And one fund — the Invesco (IVZ) Legacy Securities Master Fund LP — liquidated in March after managers concluded they would not be able to sustain its 18.2% IRR.

According to the report, Oaktree Capital Group's PPIP Fund LP generated the highest return, reporting 20.9% from inception through March 31. Oaktree's fund started in February 2010; all of the others started during the fourth quarter of 2009.

Oaktree was followed by a partnership between Angelo Gordon and General Electric Capital, at 20.2%; a partnership between Western Asset Management and the RLJ Cos., with 19.1%: Invesco, 18.2%; BlackRock (BLK), 17%; AllianceBernstein (AB), 16.7%; and Marathon, 14.5%, according to the report.

The eighth manager, Wellington Investments, garnered a much smaller 7.6% return.

(There originally were nine funds chosen by the U.S. Treasury Department to participate in the government-subsidized effort to buy toxic residential and commercial mortgages from overleveraged banks, but TCW Group was forced to liquidate its fund when then-Chief Investment Officer Jeffrey Gundlach was ousted late in 2009.)

It's unclear why Wellington lagged the others. Sara Lou Sherman, a spokeswoman for Wellington Management Co. LLP declined to comment; the Treasury Department doesn't provide information on securities the managers hold or their trading activity.

Six of the eight managers purchased both CMBS and RMBS; Oaktree restricted itself to the purchase of commercial mortgage-backed securities, while Invesco Ltd. bought only residential ones.

The eight managers had more than $29 billion combined to invest in the public-private partnership, a mixture of money raised from institutional investors, matching government funds and low-interest government loans. Their mandate: Buy the troubled mortgages weighing down bank balance sheets as part of the effort to ease the marketplace for MBS and encourage banks to increase lending.

Michael Anderson, a spokesman for the Treasury Department in Washington, said the PPIP program was just one part of an overall strategy for economic recovery.

“We believe it's been effective,” he said of the PPIP program, citing the positive returns of the money managers. It's unclear how long the PPIP will continue. The money managers say they haven't made a decision what they will do after the three years are up and they can no longer buy new mortgage assets or sell assets and reinvest under the program.

Atlanta-based Invesco, in announcing on April 3 that it had liquidated its $3.4 billion fund, reported the Treasury Department had received a total of $791 million on its initial equity investment of $581 million and the repayment plus interest of $1.2 billion in loans.

Good timing

Wilbur L. Ross — chairman and CEO of W.L. Ross & Co., one of three Invesco (IVZ) subsidiaries that teamed up to run the fund — said the investment team had concluded it was a good time to close after a market rally that sent up the value of its RMBS holdings an aggregate 200 basis points in February and March.

Mr. Ross said the company shot for a 20% profit on the assets it purchased. The 20% profit factored in a 10% drop in property value after Invesco purchased the assets, the base case model. Invesco assumed a worst-case stress scenario of a 4% profit if asset values dropped by 20%, he said.

“We weren't doing option (adjustable-rate mortgages), we weren't doing a lot of the more exotic products, because we felt in our stress case, they were the ones that were going to blow up,“ he said.

Invesco's fund had invested 68% of its assets by the time it closed, according to Treasury data.

The PPIP fund with the lowest rate of deployed capital is the one run by Oaktree. It has invested a little less than a third of its $4.6 billion as of March 31.

BlackRock (BLK) Inc. (BLK)'s PPIF LP has the second lowest rate, drawing down 76% of its $2.78 billion. BlackRock spokesman Brian Beades declined to comment, citing company policy.

Marathon Asset Management"s Legacy Securities Public-Private Investment Partnership and RLJ Western Asset's Public/Private Master Fund LP are at the other end of the scale; each has drawn down 100% of their respective $1.898 billion and $2.48 billion pools.

An Oaktree official, who requested anonymity, said Oaktree invested its capital slowly because it was difficult to find attractive commercial properties for investment.

He said Los Angeles-based Oaktree decided to specialize in CMBS because the firm has expertise in the asset class. But by the time it launched its PPIP fund on Feb. 19, 2010, the commercial mortgage market had improved dramatically.

“When the market goes down, we will purchase,” he said. “We are waiting for the right pricing.”

At AllianceBernstein (AB), New York,, “our strategy was to ramp up the program at a very quick pace,” said Michael Canter, CIO of its Legacy Securities Master Fund LP and director of structured asset research and portfolio management.

The AllianceBernstein PPIP fund, which got under way on Oct. 23, 2009, had 92.5% of its assets invested as of March 31, according to the Treasury report.

Mr. Canter said the firm was able to benefit initially from the increase in value of the distressed assets as the financial markets rallied. “From the beginning of the program to, really, the end of the first quarter in 2011, the market was almost in a straight line up,” he said.

Mr. Canter said market slides in the remainder of 2011 reversed pricing in the MBS markets, but a major recovery occurred in the beginning of this year.

“While the market slide affected performance negatively in 2011, it presented an opportunity for our fund to reinvest the money we received in principal prepayments and default recoveries at very attractive prices,” Mr. Canter said.

He said while a lot of the securities purchased by the AllianceBernstein fund have been downgraded to CCC from AAA or have defaulted, they still are attractive investments compared to other fixed-income assets.

Weighted to RMBS

Another manager, Marathon Asset Management's heavily weighted its portfolio toward RMBS because that's where portfolio managers found the best opportunity, said Andrew Rabinowitz, chief operating officer of the New York-based firm.

“Prices on commercial property never went down as severely as RMBS, so there was not as much money to make on price appreciation,” said Mr. Rabinowitz.

Mr. Rabinowitz said the firm used a comprehensive approach to determine which tranches of residential securities to buy, looking at such factors as the servicer that wrote the mortgage, the aggregate credit score of homeowners in a particular ZIP code, and the default rate.

Angelo Gordon, however, changed its portfolio mix in its PPIF Master Fund LP during 2011, to being overweight in CMBS from being overweight in RMBS, after concluding the distressed commercial mortgages offered a better profit scenario, said Mr. Lieberman.

Mr. Lieberman said his firm, in conjunction with partner GE Capital Corp., targeted investments with asymmetrical return profiles. He said in the worst-case scenario, assets were projected to deliver single-digit positive returns, while in the upside/recovery case, the assets were projected to deliver returns in the high teens to mid-20s.

He said Angelo, Gordon executives are pleased with how the partnership with the federal government has turned out. “We didn't share the views of others who were concerned with possible investment interference and diminishment of private investor returns,” he said. “We felt there was an opportunity for a win-win for private investors as well as the taxpayer, and the overall fixed-income markets.”