Untitled

[kirkbeeblog1-blog]

Big calls in Paris but no Mission: Impossible for managers

Tom Cruise wasn’t the only one livening up the French capital last week

Journeying to the HFI European Summit in Paris last week was not for the faint-hearted.

For one, movie star Tom Cruise was careering around the tight streets surrounding The Westin Paris venue filming his own stunts for the latest film in the Mission: Impossible franchise.

And for those who avoided the high-speed car chases and motor bike crashes outside the summit there were also some sweat-inducing moments as industry leaders made big predictions in the conference hall.

Luke Ellis, CEO of $89bn Man Group, said increasing running costs (particularly due to regulation) and a “whole generation” of seasoned managers deciding to throw in the towel will see the number of profitable hedge funds drop well below 1,000 in the next two years.

With Man Group operating a platform looking to attract managers who can’t or won’t go it alone, one might accuse Ellis of somewhat talking his own book. However, in a tremendously challenging asset-raising environment for emerging managers, and with more big names creaking and costly regulatory changes on their way, the dramatic drop Ellis predicts (from around 2,000 profitable firms today) might not be so far-fetched.

To remain in the black, harnessing new technology and outsourcing certain functions have been highlighted as ways of running a tighter hedge fund ship and this week we report that former Pershing Square CTO Joe Sutton has joined the growing ranks of senior buy-side technology experts deciding to offer their services to other managers.

Elsewhere at the conference, Cheyne Capital co-founder Jonathan Lourie warned a liquidity mismatch present in certain ETF markets could trigger the “mother of all blow-ups”. Again, with the rise in passive investing asking serious questions about the sustainability of certain parts of the hedge fund sector, a swipe from one of the industry’s grandees might be expected. But Jonathan Lourie joins a number of respected investment experts in raising concerns over what will happen when the music stops and everyone rushes for the exit in a world where liquidity from traditional banking sources is virtually non-existent.

We also features our latest Alphapipe/HFMWeek analysis of SEC filings highlighting the continuing trend of larger PBs cutting back on smaller, less profitable clients and mid-level players, such as Wells Fargo and Jefferies, increasing their books.

Paul McMillan is head of content at HFM Global

[kirkbeeblog1-blog]

Novus and Cheyne Capital partner to build fixed income analytics platform

Novus, the world’s leading Portfolio Intelligence platform for institutional investors and managers, and Cheyne Capital Management LLP (Cheyne), the London-based global alternative investment manager, announced today that they have entered into a partnership to build an innovative fixed-income analytics platform for both allocators and managers within the investment community.

The platform will harness the power of Novus’ robust data alongside Cheyne’s extensive credit investing expertise to provide risk-based analytics and portfolio insights typically not widely available in fixed income, to improve investment skills, portfolio optimisation and performance potential. The Credit team at Cheyne Capital will work closely with Novus’ engineers and data scientists to help inform and shape key product decisions to create this cutting-edge platform for institutional allocators and managers. Together, the partnership will look to contribute to the growing understanding of factor investing in credit markets. It will also assist Cheyne in advancing its own skillset and support Novus in expanding its analytics offering across the fixed income asset class, a field whose complexity has often confounded the provision of in-depth analytics. “Novus has made an impressive impact on the asset management industry by equipping both allocators and asset managers with insights and tools to better understand, measure and improve portfolio construction,” said Stuart Fiertz, Cheyne Capital’s co-founder, President and Director of Research. “At Cheyne, our priority is to consistently deliver value for our clients and the ability to have a strong understanding of both markets and positions, and glean insights accordingly is essential to achieving this. We see a growing opportunity for alternative asset managers and FinTech companies to work together to help propel our industry forward and provide higher-quality intelligence to allocators to improve processes for selecting investments and managers.” Andrea Gentilini, Head of Europe for Novus added: “Novus is committed to designing and building a world-class fixed-income analytics platform for the investor community. The company is investing a substantial amount of its technology and engineering resources into creating a fully deployable product that satisfies the market demand for better, more accurate and predictive fixed income analytics.” “By constructing a team of cutting-edge data scientists, credit analytics specialists and industry practitioners, Cheyne has become one of the most experienced and knowledgeable fixed-income experts. We are excited to work with Cheyne to build this platform, which will span research and portfolio management across the credit sector, and help to accelerate the development of Portfolio Intelligence in the broader investment community”.

View Original Article at https://www.finextra.com/pressarticle/68268/novus-and-cheyne-capital-partner-to-build-fixed-income-analytics-platform

[kirkbeeblog1-blog]

Big calls in Paris but no Mission: Impossible for managers

Tom Cruise wasn’t the only one livening up the French capital last week

Journeying to the HFI European Summit in Paris last week was not for the faint-hearted.

For one, movie star Tom Cruise was careering around the tight streets surrounding The Westin Paris venue filming his own stunts for the latest film in the Mission: Impossible franchise.

And for those who avoided the high-speed car chases and motor bike crashes outside the summit there were also some sweat-inducing moments as industry leaders made big predictions in the conference hall.

Luke Ellis, CEO of $89bn Man Group, said increasing running costs (particularly due to regulation) and a “whole generation” of seasoned managers deciding to throw in the towel will see the number of profitable hedge funds drop well below 1,000 in the next two years.

With Man Group operating a platform looking to attract managers who can’t or won’t go it alone, one might accuse Ellis of somewhat talking his own book. However, in a tremendously challenging asset-raising environment for emerging managers, and with more big names creaking and costly regulatory changes on their way, the dramatic drop Ellis predicts (from around 2,000 profitable firms today) might not be so far-fetched.

To remain in the black, harnessing new technology and outsourcing certain functions have been highlighted as ways of running a tighter hedge fund ship and this week we report that former Pershing Square CTO Joe Sutton has joined the growing ranks of senior buy-side technology experts deciding to offer their services to other managers.

Elsewhere at the conference, Cheyne Capital co-founder Jonathan Lourie warned a liquidity mismatch present in certain ETF markets could trigger the “mother of all blow-ups”. Again, with the rise in passive investing asking serious questions about the sustainability of certain parts of the hedge fund sector, a swipe from one of the industry’s grandees might be expected. But Jonathan Lourie joins a number of respected investment experts in raising concerns over what will happen when the music stops and everyone rushes for the exit in a world where liquidity from traditional banking sources is virtually non-existent.

We also features our latest Alphapipe/HFMWeek analysis of SEC filings highlighting the continuing trend of larger PBs cutting back on smaller, less profitable clients and mid-level players, such as Wells Fargo and Jefferies, increasing their books.

Paul McMillan is head of content at HFM Global

[kirkbeeblog1-blog]

Britain’s Cheyne Capital Launches Hedge Fund For Social Services

British hedge fund sponsor Cheyne Capital, led by Jonathan Lourie, reportedly plans to start the Cheyne Social Property Impact Fund, which aims to buy property that it will then rent to organisations to deliver services like affordable housing, aid for the elderly and care through the National Health Service, according to Deal Book.

The new fund, which is to charge investors about a 1.5 percent management fee and a 10 percent performance fee after it hits a return rate of about 6 percent, has begun investing in Britain on 27 November 2014 with an aim to raise about £300 million (US$471.18 million) with target returns of 10 to 12 percent with leverage. Government-established finance group Big Society Capital supported the Cheyne fund with a seed commitment.

[kirkbeeblog1-blog]

British Firm Starts Hedge Fund for Social Services

When a potential hedge fund investor recently visited a mental health charity, he asked what the organization would need to help more people.

“Property” was the answer.

Cheyne Capital, a $6 billion hedge fund based in London, hopes to offer that with a new fund it is setting up to buy property that it will then rent to organizations that deliver services like affordable housing, aid for the elderly and care through the National Health Service.

The Cheyne Social Property Impact Fund, which was able to start investing on Thursday in Britain, aims to raise about 300 million pounds with target returns of 10 to 12 percent with leverage. It is expected to charge investors about a 1.5 percent management fee and a 10 percent performance fee after it hits a return rate of about 6 percent.

“There is a tremendous social need for this,” said Shamez Alibhai, who will head the investment team and who has worked in real estate for 13 years. He has been at Cheyne since 2006.

As recently as 2012, government grants for social housing were about £2.5 billion to £3 billion, Mr. Alibhai said. Those funds were reduced to nearly £500 million after the British government cut expenses in the financial crisis.

“That’s £2.5 billion of capital withdrawn from the system,” Mr. Alibhai said. “We hope to play our part replacing some of that.”

The fund aims to balance financial and social returns. It is part of a growing trend of investing with an eye to improving society as well, an effort that includes so-called social impact bonds.

Big Society Capital, a government-established finance group with a social mission, anchored the Cheyne fund with a seed commitment.

The group’s chief executive, Nick O’Donohoe, said Cheyne was an “interesting partner.”

“They have significant resources,” he said, “and the ability to attract substantially more capital” than a typical social impact organization.

Mr. O’Donohoe acknowledged that the group was skeptical when it was first approached by Cheyne. But, he said, “after spending a considerable amount of time with Shamez and the principals of the organization, we recognized that they were doing this for the right reasons, that they had a genuine interest in creating a social impact.”

Mr. Alibhai said the fund went to great lengths to ensure that it would be managed and measured for its social impact as well as its financial returns. A partner organization, New Philanthropy Capital, a charities research group, will sit on the investment committee to help evaluate potential investment opportunities. Along with financial statements, the fund will provide social audits, with metrics like which groups have been helped and whether rents are affordable and properties are well maintained.

Alongside financial covenants will be social covenants, to make sure that those in greatest need are gaining access to the properties first, for example, and that staff members have been properly trained.

“We want to ensure that the social responsibility element of the fund is embedded into the DNA of the fund,” Mr. Alibhai said.

Social impact investing is on the rise. In December 2013, Merrill Lynch and U.S. Trust raised $13.5 million from prominent clients like the billionaire investor and oil trader John Arnold for a social impact bond whose proceeds would finance a program to lower recidivism rates among former convicts in New York.

Groups like the Bridges Ventures in Britain, founded in 2002, have been involved in social impact investing for a long time, with funds aimed at sustainable growth, property and the social sector. More recently, the French insurer and investment manager AXA Groupstarted a social impact fund of funds with 150 million euros.

Such groups aim to fill the gaps where governments are increasingly falling short. Big Society Capital, the anchor investor, which is run separately from the government, was set up to build the social investment market in Britain so that charities and social enterprises could gain access to financing and in turn widen their impact. Financed in part by dormant English bank accounts, it has committed more than £165 million in investments to organizations that lend to charities and social enterprises.

As part of the due diligence for the Cheyne fund, Mr. Alibhai met with organizations — councils, municipal governments, housing organizations and the National Health Service — to determine whether demand existed for its offering. None turned him away for representing a hedge fund.

“We never came across organizations who said, ‘We don’t want to explore this further because of what or who you are,’ ” he said.

The fund is structured as a real estate investment trust, with similar tax benefits to those in the United States. Returns are predicated on affordable rents and the fund’s ability to generate attractive debt financing, Mr. Alibhai said.

[kirkbeeblog1-blog]

British Firm Starts Hedge Fund for Social Services

When a potential hedge fund investor recently visited a mental health charity, he asked what the organization would need to help more people.

“Property” was the answer.

Cheyne Capital, a $6 billion hedge fund based in London, hopes to offer that with a new fund it is setting up to buy property that it will then rent to organizations that deliver services like affordable housing, aid for the elderly and care through the National Health Service.

The Cheyne Social Property Impact Fund, which was able to start investing on Thursday in Britain, aims to raise about 300 million pounds with target returns of 10 to 12 percent with leverage. It is expected to charge investors about a 1.5 percent management fee and a 10 percent performance fee after it hits a return rate of about 6 percent.

“There is a tremendous social need for this,” said Shamez Alibhai, who will head the investment team and who has worked in real estate for 13 years. He has been at Cheyne since 2006.

As recently as 2012, government grants for social housing were about £2.5 billion to £3 billion, Mr. Alibhai said. Those funds were reduced to nearly £500 million after the British government cut expenses in the financial crisis.

“That’s £2.5 billion of capital withdrawn from the system,” Mr. Alibhai said. “We hope to play our part replacing some of that.”

The fund aims to balance financial and social returns. It is part of a growing trend of investing with an eye to improving society as well, an effort that includes so-called social impact bonds.

Big Society Capital, a government-established finance group with a social mission, anchored the Cheyne fund with a seed commitment.

The group’s chief executive, Nick O’Donohoe, said Cheyne was an “interesting partner.”

“They have significant resources,” he said, “and the ability to attract substantially more capital” than a typical social impact organization.

Mr. O’Donohoe acknowledged that the group was skeptical when it was first approached by Cheyne. But, he said, “after spending a considerable amount of time with Shamez and the principals of the organization, we recognized that they were doing this for the right reasons, that they had a genuine interest in creating a social impact.”

Mr. Alibhai said the fund went to great lengths to ensure that it would be managed and measured for its social impact as well as its financial returns. A partner organization, New Philanthropy Capital, a charities research group, will sit on the investment committee to help evaluate potential investment opportunities. Along with financial statements, the fund will provide social audits, with metrics like which groups have been helped and whether rents are affordable and properties are well maintained.

Alongside financial covenants will be social covenants, to make sure that those in greatest need are gaining access to the properties first, for example, and that staff members have been properly trained.

“We want to ensure that the social responsibility element of the fund is embedded into the DNA of the fund,” Mr. Alibhai said.

Social impact investing is on the rise. In December 2013, Merrill Lynch and U.S. Trust raised $13.5 million from prominent clients like the billionaire investor and oil trader John Arnold for a social impact bond whose proceeds would finance a program to lower recidivism rates among former convicts in New York.

Groups like the Bridges Ventures in Britain, founded in 2002, have been involved in social impact investing for a long time, with funds aimed at sustainable growth, property and the social sector. More recently, the French insurer and investment manager AXA Groupstarted a social impact fund of funds with 150 million euros.

Such groups aim to fill the gaps where governments are increasingly falling short. Big Society Capital, the anchor investor, which is run separately from the government, was set up to build the social investment market in Britain so that charities and social enterprises could gain access to financing and in turn widen their impact. Financed in part by dormant English bank accounts, it has committed more than £165 million in investments to organizations that lend to charities and social enterprises.

As part of the due diligence for the Cheyne fund, Mr. Alibhai met with organizations — councils, municipal governments, housing organizations and the National Health Service — to determine whether demand existed for its offering. None turned him away for representing a hedge fund.

“We never came across organizations who said, ‘We don’t want to explore this further because of what or who you are,’ ” he said.

The fund is structured as a real estate investment trust, with similar tax benefits to those in the United States. Returns are predicated on affordable rents and the fund’s ability to generate attractive debt financing, Mr. Alibhai said.

[kirkbeeblog1-blog]

Private credit managers go far and wide for expertise

Private credit managers are on a hiring spree.

Recruiters said demand from money managers for senior executives, portfolio managers, analysts and marketers with private credit know-how is running high.

“We’re definitely seeing an uptick in recruitment,” said Paul Heller, the New York-based managing partner and head of the financial services practice of executive recruiter Caldwell Partners International.

Mr. Heller said there’s high interest within private credit shops for people with experience in direct lending, loan origination, structured credit and leverage finance.

Talent-seekers include money managers looking to build or expand private credit businesses, particularly private equity and other alternative asset managers; insurance companies that are deepening their bench of internal private credit managers; and a small number of institutional investors, especially Canadian public pension plans, that are building or expanding internal private credit investment teams, head hunters reported.

The C$286.5 billion ($228 billion) Caisse de Depot et Placement du Quebec, Montreal, for example, is building an internal team of executives and analysts to source partnerships with private credit firms to manage foreign investments within its C$43.5 billion credit portfolio. Canadian private credit investments are managed internally.

Caisse hired Robert Hetu in June as its New York-based vice president and head of U.S. private debt. Mr. Hetu was a managing director and leader of Credit Suisse AG’s corporate lending group. An analyst will be added in New York to assist Mr. Hetu and a private credit investment officer may be added in the fund’s London office.

One big reason for the uptick in hiring is interest in and inflows from institutional investors like Caisse that are seeking diversified return streams from the many variations of private credit strategies, including special situations and distressed, direct lending, real estate debt and structured products.

Commitments growing

Analysis of hiring activity from P&I reporting shows new assets committed to alternative credit strategies by institutional investors totaled $79.7 billion in the seven years and one quarter ended March 31. Commitments have grown every year since 2010, with $18.26 billion for 2016 coming in 348% higher than the $4.08 billion in 2010. Institutional commitments to distressed debt, special situations, mezzanine, structured credit and multiasset credit strategies hit a high of $18.3 billion in 2016.

“Private credit is booming and demand for talent is everywhere,” said Scott Fletcher, a San Francisco-based partner of Jamesbeck Global Partners LLC, a specialist asset management recruiter. He stressed that competition for private credit professionals is intense at every level, from C-suite executives to portfolio managers and analysts, loan originators, leverage finance specialists and marketers, noting private credit search activity is among the busiest of Jamesbeck’s ​ practice areas.

In the Europe, Middle East and Africa region, recruitment activity is especially strong for professionals with experience in trade finance in both developed and emerging markets; emerging markets direct lending; energy and infrastructure finance; and direct corporate financing, said Alex Cormack, the group managing director of executive search firm Sheffield Haworth.

He also noted hiring increased in London for fund financing — providing financing and capital solutions to private equity, secondaries firms, hedge funds and hedge fund of funds.

In the U.S., recruitment in private credit remains steady, with particular interest in real estate and infrastructure direct lending, Mr. Cormack said.

Given heightened competition, poaching has become more common among larger firms with existing private credit businesses or plans to build credit teams, observers said, pointing to a rash of high-profile moves by individuals and teams so far this year.

In August, credit specialist manager Cheyne Capital Management (UK) LLP, London, hired Anthony Robertson as chief investment officer of a new 10-person strategic value credit strategy team he will build. Dominique Kobler was brought on board as a senior member of the firm’s risk team.

Messrs. Robertson and Kobler came from rival London credit manager BlueBay Asset Management LLP, where they held high-level positions as head of leverage finance and head of risk and performance, respectively.

Cheyne manages $19 billion and BlueBay manages $51 billion in credit-oriented strategies.

Alternative asset manager Ares Management LLC, New York, also tapped BlueBay when it hired Peter Higgins in May as a London-based partner and portfolio manager for the firm’s credit team, which manages $65 billion. Mr. Higgins, who will lead the expansion of Ares’ European leverage finance strategies, was a partner and senior portfolio manager in BlueBay’s global leverage finance unit.

CQS (U.K.) Ltd., London, LLP recruited Nicholas Pappas as head of credit in May, replacing Simon Finch. Mr. Pappas was co-CEO of the London office of credit shop BlueMountain Capital Management LLC. CQS manages about $12 billion and BlueMountain runs $19 billion in credit-oriented hedge fund and long-only strategies.

PineBridge hires

PineBridge Investments LLC, New York, lifted out a team of three — James Fisher, Joseph Taylor and Doug Lyons — from Benefit Development Corp. of America, now managed by Benefit Street Partners LLC. The three new managing directors will launch a direct lending business to serve U.S. middle-market companies.

Mr. Fisher, who leads the new team at PineBridge, was president of BDCA; Mr. Taylor was managing director and head of capital markets; and Mr. Lyons was managing director and head of origination. PineBridge manages $85.5 billion.

Jamesbeck’s Mr. Fletcher said despite high demand from all quarters of the private credit sector, high-quality, experienced candidates have become wary of changing jobs given the specter of a market downturn, and it has become more difficult for smaller firms to recruit candidates.

“We’re getting late in the bull market cycle and it can’t go on forever,” Mr. Fletcher said. “If you are at a well-established, market-leading private credit firm, you have a better chance of withstanding a market downturn. My advice to candidates is to get themselves on a large, stable platform because being at a top five or 10 firm will be a distinct advantage.”

[kirkbeeblog1-blog]

Cheyne Capital Unveils New Sub-Investment Grade Strategy

Alternative credit specialist Cheyne Capital has debuted a new distressed business that will be managed by former BlueBay Asset Management executive Anthony Robertson.

Although already very prominent in credit investing and thus no stranger to the distressed space, Cheyne’s new Strategic Value Credit (SVC) strategy is the first time the London-based company has created a dedicated group to focus on distressed investing.

Cheyne’s decision to launch a separate sub-investment grade business is anchored on the idea that opportunities in the segment will increase as the current credit cycle comes to a close, market dislocations rise and liquidity constraints grow in the high yield market, the company said in a statement.

The new strategy will employ a value investing approach in order to capitalize on market inefficiencies, and will initially focus on heightened illiquidity in the European sub-investment grade credit market, the statement added. It will seek to build a concentrated portfolio of mis-valued securities as well as selective distressed situations.

Robertson, formerly head of leveraged finance at BlueBay Asset Management until October of last year, will be CIO of SVC and will build an initial team of 10 for the new effort, including portfolio manager David Lofts and senior analysts Jacopo Rubbia and Jorge Lazaro.

“We see growing opportunities in sub-investment grade credit, both today and into the future with increasing investor interest in capacity-constrained, closed-end strategies that are best adapted to harnessing the dissipating market liquidity,” said Robertson in the statement.

Formed in 2000, Cheyne Capital is one of Europe’s leading alternative investment managers. The company invests across the capital structure in six main areas of expertise: Real Estate Debt, Social Property Impact, Corporate Credit, Convertible Bonds, Event Driven and Equities.  The company has some $17 billion in assets under management primarily for pension funds, insurance companies, sovereign wealth funds, endowments, banks, funds of funds and other financial institutions.

[kirkbeeblog1-blog]

Cheyne Capital launches distressed credit business

Opalesque Industry Update - Cheyne Capital, the London-based alternative asset manager, announces the launch of a new sub-investment grade credit business, SVC.

The team will be run by Anthony Robertson, formerly Head of Leveraged Finance at BlueBay Asset Management, who joins as CIO of the strategy. Also joining are David Lofts as Portfolio Manager and Head of Trading and Origination, and Senior Analysts Jacopo Rubbia and Jorge Lazaro, with further hires joining in the coming months.

The business has been formed to take advantage of investment opportunities resulting from the changing market backdrop and growing investor interest for tailored closed-end solutions to credit allocations. The SVC business will focus on meeting evolving investor needs over a full investment cycle and offer capacity-constrained products that are adapted to client requirements and the structural characteristics inherent in this segment of the credit market.

As the late-stage credit cycle creates growing dislocation and liquidity constraints in the high yield segment, the team will employ a value investing approach founded on fundamental research principles that takes advantage of market inefficiencies. Its initial strategy will focus on the heightened illiquidity in European sub-investment grade credit, seeking to identify a concentrated portfolio of mis-valued securities, as well as selective distressed situations.

The business will comprise 10 people in the near term and will encompass research, trading, strategy, origination and legal. The team has several decades’ experience of working together in the credit markets, where Anthony has been investing and David has been a sell-side practitioner since the start of the European high yield market in the mid-1990s.

Jonathan Lourie, co-Founder and CEO of Cheyne Capital said, “We are delighted to welcome Anthony and his team to this new business whose depth of experience, track record and credit markets expertise make them amongst the best in this field. We felt the timing was right to enter this segment of the credit markets and deliberately sourced a team with significant experience in distressed investing, in line with our approach of identifying opportunities presented by market dislocations and the best ways of delivering their value to our investors.

"Credit investing has been part of our DNA for the past 17 years and we believe the strong contiguity we have across Cheyne’s credit strategies will enhance our ability to provide our clients with tailored solutions that seek to achieve the best risk-adjusted returns over the medium to long-term.”

Anthony Robertson, CIO of the SVC business, “We see growing opportunities in sub-investment grade credit, both today and into the future with increasing investor interest in capacity-constrained, closed-end strategies that are best adapted to harnessing the dissipating market liquidity. In an increasingly complex environment that requires deep technical capabilities, Cheyne’s reputation as an established fundamental credit investor, with long-term investment in people and infrastructure, fits with our approach and we look forward to working with the business to develop our offering and grow the team.

[kirkbeeblog1-blog]

Alts boutique launches enhanced global credit fund

Alternatives boutique Cheyne Capital Management has launched a long-biased investment grade Ucits fund, the company has confirmed.

The Cheyne Enhanced Global Credit fund is the firm’s latest offering from its investment grade corporate credit strategy and is a long-biased, investment grade corporate credit fund.

The Dublin-domiciled strategy is an extension of Cheyne’s Ucits-compliant Global Credit fund, but will run with a slightly different risk/return profile.

The fund will be managed by Sean Boland and Mark Flack, who are part of the firm’s corporate credit team. This was established in 2002 and is run by John Weiss and David Peacock.

Registered with the Bank of Ireland on October 11, the new strategy has been launched in response to investor demand and is expected to be live before the end of the year.

Cheyne Capital confirmed the launch of the fund but were unable comment further on the strategy.

[kirkbeeblog1-blog]

Banks to Funds: Have Some Leverage With That Deal

Funds get financing to lever up risky loans and esoteric investments

By  Christopher Whittall

Dec. 17, 2017 11:00 a.m. ET

Banks are ramping up a business that was popular before the financial crisis—offering investors ways to lever up sometimes illiquid and complex investments to amplify their returns.

Years of ultralow interest rates have pushed down returns across markets, making such strategies increasingly appealing to funds in Europe and the U.S.

A decade ago, overleveraged banks and investors nearly crashed the global financial system. While leverage is nowhere near those levels and new banking regulations place restrictions on how high it can go, some bankers and funds are still concerned about signs of leverage creeping back into the system.

The level of leverage across debt markets can be hard to track given many transactions are private, but funds report that banks have been stepping up their efforts to lend to investors and they are increasingly saying yes.

Recently, several banks offered London-based Cheyne Capital’s Strategic Value Credit unit finance to leverage a €300 million ($353.4 million) pool of loans to Irish midsize firms, potentially doubling the London-based fund’s returns on that investment to roughly 12% to 15%. 

Cheyne SVC’s Chief Investment Officer Anthony Robertson hadn’t previously thought of using leverage, but found the prospect of levering this niche investment by two times to be a tempting offer.

“In a world where rates are so anemic, investment-management funds desperately need to bolster returns,” said Mr. Robertson, who hopes to close the deal in the new year. But “clearly it does enhance the risk profile,” he said.

Corporate bonds are trading near levels not seen before the financial crisis, when rampant demand for income pushed returns lower. Government bonds continue to offer low returns, with 10-year Treasurys currently yielding 2.355%.

Adding leverage can multiply gains when investments are steady or rising in value. Put simply, funds borrow to bet more money on an investment. But it also magnifies losses, sometimes ensnaring investors in a vicious circle where they are forced to sell as prices fall, triggering further declines and more fire sales.

Funds say they are being offered leverage that would allow them to increase their investments in loans to large, highly-indebted companies by up to four times. Banks are also offering up to 10 times leverage on the highest-rated slices of collateralized loan obligations, products that carve up pools of risky loans. More esoteric investments like bundles of midcap loans, real estate or troubled loans can get closer to two times leverage, they say.

“The most worrisome thing I see is people levering more credit,” said David Allen, chief investment officer of AlbaCore Capital.

Mr. Allen said he is being offered leverage more frequently when he buys debt, though he prefers not to use it. “It’s like going to McDonald’s and being offered French Fries: It’s always available,” he said.

Providing leverage is a growth market for investment banks struggling with declines in traditional trading units. Fixed-income financing activities at the top 12 global investment banks are on course to increase 10% to 15% this year, according to analytics firm Coalition.

That has come as banks have increased their lending against a variety of debt securities, ranging from high-grade bonds to more complex instruments like asset-backed securities, said Amrit Shahani, research director at Coalition.

Bankers in JPMorgan Chase & Co.’s London office have discussed with investors options that would allow them to lever their whole fund roughly two times over, according to people familiar with the matter.

Goldman Sachs Group Inc.’s revealed plans in a September presentation to double by 2020 the size of its balance sheet dedicated to financing “bespoke pools of collateral” for its clients, from around $5 billion in 2016. That could generate an additional $100 million of annual revenue, the bank said.

Barclays PLC said it would deploy leverage across its financing and macro units to help drive income growth in its latest quarterly results.

Other banks are wary. Citigroup Inc. has been financing fewer structured credit assets this year as competitors have been lending at ever lower rates, according to people familiar with the matter.

To be sure, there are big differences between conditions before the financial crisis and now.

The amount of leverage being offered is far lower than before that crisis, when it was possible to lever some investments up to 80 times over, investors say. Among other differences, trades these days are less reliant on short-term funding compared with a decade ago. Investors have to post cash to cover mark-to-market losses on a position, which should limit how much they are willing to borrow.

There are also regulations designed to cap banking system leverage. This year the Federal Reserve introduced a measure designed to calculate banks’ total leverage in its stress tests.

While systemic risk appears to be lower, many investors are still uneasy about the increase in debt in some investment strategies. That is particularly so for more niche assets, such as midmarket loans, that are harder to value and could be tricky to unload when markets fall.

“You always have to be a bit concerned of the lowering of credit standards and the proliferation of more leverage. That’s always a canary in a coalmine,” said Stephen Ketchum, managing partner at New York-based Sound Point Capital.

[kirkbeeblog1-blog]

Credit default swaps too attractive to ignore: Cheyne

Credit default swaps are a proven strategy that investors struggling to generate uncorrelated returns from fixed income markets should exploit, Cheyne Capital president and director of research Stuart Fiertz argued.

Fiertz said credit default swaps allow investors to capture credit risk premia with less volatility, better liquidity, and the potential to capture excess return.

“We’ve been managing credit default swaps for 15 years – it’s a tested strategy,” he said. “And the market has evolved to the point that we think it’s highly appropriate for the savings market down here in Australia.”

Fiertz made the comments at the 2017 Conexus Financial Absolute Returns Conference, in a keynote address titled, ‘Expecting credit premia via credit default swaps’.

He told the gathering of local investment specialists there is a strong case for Australian institutional asset owners to invest in credit default swap strategies. Credit risk premia is a “not yet fully appreciated, not fully exploited” area that many organisations still shy away from because there is not yet decades of academic research to support the strategy, Fiertz said.

He described credit default swaps as a “simple instrument” that allows investors to be “protection sellers”.

“We take the credit risk, we get paid a premium for that. And we only have to pay out [if there is] a credit event,” Fiertz explained. “It’s similar, in terms of downside risk, to investing in fixed income in a traditional sense, except you don’t have to put up the money in the first place to do it. And that gives you various advantages that allow you to easily use your collateral efficiently. Some might call that leverage, others might call it being efficient.”

Pre-GFC problems gone

Fiertz said the credit default swap market is more attractive today than it was prior to the global financial crisis (GFC) in 2008, since the standardisation of terms in the market in recent years has reduced layered counterparty risk.

“In today’s market, and this is a post-GFC development, we can trade credit default swaps as easily as equities. And when we close out a position, we close it out and [in effect] the contracts are torn up,” Fiertz said. “What happened pre GFC is that you ended up with mille-feuille 10 times over. You had a thousand different offsetting positions. And that’s when the GFC happened and people were worried about the layered counterparty risk. But that’s no longer a factor.”

He said that while near record low interest rates have flattened bonds, the “juice has not been squeezed out of” credit default swaps.

“I believe credit default swaps are the future of how credit is going to be traded and, indeed, how it’s trading today, and one of the reasons that’s the case is that credit default swaps act as a future,” Fiertz said.

He argued they are more liquid than their underlying corporate bonds.

Liquidity after Diesel Gate

“The liquidity in corn is not the bushel of corn in Kansas or the bushel of corn in Alberta, it’s the bushel of corn that trades [on the futures exchange] in Chicago. The same is the case with credit default swaps.”

As a real-life example of how this liquidity has been tested, he pointed to trading data following the revelation that Volkswagen had cheated on its emissions reporting.

“If we take a case like Diesel Gate, where VW got caught with its pants down, during the week that happened” there was significantly more trading in single-named credit default swaps than in cash bonds, Fiertz said.

“The liquidity in the corporate bond area or the corporate credit area is in the future and it shouldn’t come as a surprise, when you think of it as acting as a future. Nobody wants to trade with their limited capital at an investment bank via the Swiss franc-denominated VW bond, the Yen one, or the Euro-denominated one. They’d much rather trade the credit default swap.”

Fiertz said daily trading volumes in credit default swaps are already at about half those of the main US equity benchmark, the S&P 500.

“Daily volume in the CDS Index is 77 billion and it’s a little hard to see this lightening,” he said. “And what’s even more interesting now is the development of the credit option market, where you’ve got as much as 20 billion trading a day – a very healthy two-way market.”

Fiertz said investors in credit default swaps are being paid for four-and-a-half times the average risk and more than twice the tail risk.

“In my mind, that is a useful definition of excess return,” he said. “I’d much rather be in credit default swaps than cash bonds.”

them�UX�9�D

[kirkbeeblog1-blog]

Credit default swaps too attractive to ignore: Cheyne

Credit default swaps are a proven strategy that investors struggling to generate uncorrelated returns from fixed income markets should exploit, Cheyne Capital president and director of research Stuart Fiertz argued.

Fiertz said credit default swaps allow investors to capture credit risk premia with less volatility, better liquidity, and the potential to capture excess return.

“We’ve been managing credit default swaps for 15 years – it’s a tested strategy,” he said. “And the market has evolved to the point that we think it’s highly appropriate for the savings market down here in Australia.”

Fiertz made the comments at the 2017 Conexus Financial Absolute Returns Conference, in a keynote address titled, ‘Expecting credit premia via credit default swaps’.

He told the gathering of local investment specialists there is a strong case for Australian institutional asset owners to invest in credit default swap strategies. Credit risk premia is a “not yet fully appreciated, not fully exploited” area that many organisations still shy away from because there is not yet decades of academic research to support the strategy, Fiertz said.

He described credit default swaps as a “simple instrument” that allows investors to be “protection sellers”.

“We take the credit risk, we get paid a premium for that. And we only have to pay out [if there is] a credit event,” Fiertz explained. “It’s similar, in terms of downside risk, to investing in fixed income in a traditional sense, except you don’t have to put up the money in the first place to do it. And that gives you various advantages that allow you to easily use your collateral efficiently. Some might call that leverage, others might call it being efficient.”

Pre-GFC problems gone

Fiertz said the credit default swap market is more attractive today than it was prior to the global financial crisis (GFC) in 2008, since the standardisation of terms in the market in recent years has reduced layered counterparty risk.

“In today’s market, and this is a post-GFC development, we can trade credit default swaps as easily as equities. And when we close out a position, we close it out and [in effect] the contracts are torn up,” Fiertz said. “What happened pre GFC is that you ended up with mille-feuille 10 times over. You had a thousand different offsetting positions. And that’s when the GFC happened and people were worried about the layered counterparty risk. But that’s no longer a factor.”

He said that while near record low interest rates have flattened bonds, the “juice has not been squeezed out of” credit default swaps.

“I believe credit default swaps are the future of how credit is going to be traded and, indeed, how it’s trading today, and one of the reasons that’s the case is that credit default swaps act as a future,” Fiertz said.

He argued they are more liquid than their underlying corporate bonds.

Liquidity after Diesel Gate

“The liquidity in corn is not the bushel of corn in Kansas or the bushel of corn in Alberta, it’s the bushel of corn that trades [on the futures exchange] in Chicago. The same is the case with credit default swaps.”

As a real-life example of how this liquidity has been tested, he pointed to trading data following the revelation that Volkswagen had cheated on its emissions reporting.

“If we take a case like Diesel Gate, where VW got caught with its pants down, during the week that happened” there was significantly more trading in single-named credit default swaps than in cash bonds, Fiertz said.

“The liquidity in the corporate bond area or the corporate credit area is in the future and it shouldn’t come as a surprise, when you think of it as acting as a future. Nobody wants to trade with their limited capital at an investment bank via the Swiss franc-denominated VW bond, the Yen one, or the Euro-denominated one. They’d much rather trade the credit default swap.”

Fiertz said daily trading volumes in credit default swaps are already at about half those of the main US equity benchmark, the S&P 500.

“Daily volume in the CDS Index is 77 billion and it’s a little hard to see this lightening,” he said. “And what’s even more interesting now is the development of the credit option market, where you’ve got as much as 20 billion trading a day – a very healthy two-way market.”

Fiertz said investors in credit default swaps are being paid for four-and-a-half times the average risk and more than twice the tail risk.

“In my mind, that is a useful definition of excess return,” he said. “I’d much rather be in credit default swaps than cash bonds.”

[kirkbeeblog1-blog]

Mideast investors push ahead for London assets

Spike in interest for £100m plus commercial and residential assets, says fund manager

Dubai: Wealthy Middle East investors seem to be doubling down on their favourite overseas real estate destination — London.

“We are seeing an increase in enquiries from ME investors for large ticket [plus £100 million [Dh454.8 million]] prime office and residential assets in the London area,” said Jonathan Lourie, CEO of Cheyne Capital, which operates real estate focused funds and currently tapping investors for two of its latest ones for a combined £800 million.

“There is a very strong expectation that lease demand for London offices will reduce substantially in light of Brexit. Though this may be true for some sub-markets in the London office market, it does not hold across all of London in general.

“The Canary Wharf market, with its large concentration of financial services occupiers is probably the most exposed to lease demand declines. If you look at the mid-town and West End markets [dominated by media, technology, insurance, biotechnology, etc], you see a dynamic of limited supply and stable demand.

“Rather than a cliff-edge fall in demand for space, we see a lengthening in the time an occupier takes to make leasing decisions and the incentives they require as the key risk post-Brexit.”

For investors seeking longer term value rather than trophy assets, London offers a lot to pick and choose from these days. There have been declines in value for offices after Brexit. “It is important to note that the current bid prices for value-add London offices are already reflecting a very harsh post-Brexit scenario for rents and demand,” said Lourie.

Asset exposures

As for prime residential properties in London, Cheyne is picking its way selectively.

Instead of putting in direct equity into real estate assets, Cheyne takes exposures in the financial instruments related to those. This could take the form of bonds, senior or mezzanine debt, whole loans and even “special situations”, which essentially relate to asset exposures that are under stress.

With London property values and demand patterns volatile, traditional lenders may be a trifle reluctant to take such exposures. And that is where Cheyne sees opportunities.

“After Brexit, the sweet spot has been senior lending, and buying CMBS (commercial mortgage backed securities),” said Ravi Stickney, who heads the fund manager’s real estate business. “Brexit has already impacted asset values, they were falling before and lending is being even more curtailed.

“Immediately we are already seeing some stressed recapitalisations, borrowers coming to us with great assets who are under stress because recapitalising has become more difficult.

“Values are falling for City offices and we’re picking up controlling pieces like we did in the 2009-12 period. We buy bonds that are at an attractive level and have control rights that enable us to influence the outcome. We have a seat at the table and we look to work towards a consensual solution.”

Factbox: Key German cities are at their price peaks

* Going bargain hunting in German real estate? It depends on what you want to pick up in a marketplace touted as the next best option in Europe by some.

According to Jonathan Lourie of Cheyne Capital, “Core income assets in Frankfurt and Berlin are at the top of the value cycle and driven by strong demand from yield hungry investors in a low rate environment.

“There are bargains to be had in Germany — we believe that these are available via the distressed/non-performing loan route. German institutional investors, whilst attracted to core income, are averse to investing in troubled debt situations.

“Hence, the dislocation between assets procured through a debt situation and via an asset auction can be significant.”

Original article can be found here.

[kirkbeeblog1-blog]

Cheyne Capital closes CRECH III Fund at USD770m

Cheyne Capital Management has closed its Cheyne Real Estate Credit Holdings Fund III (CRECH III) above target at approximately USD770 million, an 18 per cent increase from its initial goal of USD650 million, bringing the net assets of Cheyne’s Real Estate team to USD2.1 billion.

CRECH III is the third fund in Cheyne Capital’s real estate direct lending strategy, which started in 2011, following the launch of the Cheyne Real Estate Debt Fund, focused on CMBS and RMBS, in 2009. CRECH III provides real estate loan solutions to help fill the gap left by European banks as they continue to retreat from lending and focus on asset disposals and recapitalisation. Since the launch of the CRECH programme in 2011, Cheyne has deployed over USD1.5 billion in private credit investments and special situation opportunities. The invested sum is spread across 38 different deals. Of these deals, the funds have realised seven investments with a realised profit (comprising coupon and profit participations) of USD67 million against an investment sum of USD248 million (representing a total return of 27 per cent). “We have known for a long time that there are ample opportunities in European real estate lending, and the closure and oversubscription of our third fund focused on this sector is continued proof that it remains ripe for investing. We plan to launch a fourth fund later this year,” says Ravi Stickney, Partner and Head of Real Estate for Cheyne Capital. “Europe’s continued emergence from the financial crisis as it rights the ship will fuel a strong pipeline of compelling deals in this sector, which will be led by an increased demand for alternative credit needed to fill the void left by the big banks retreating from this space.” “Our long-term focus on European real estate has allowed us to build a large and experienced team that can identify and fund attractive opportunities in the sector, and the closure of our third fund in this space above target is an excellent testament to this ability,” says Stuart Fiertz, Co-Founder, President and Director of Credit Research for Cheyne Capital.

[kirkbeeblog1-blog]

Kier Living and Cheyne Capital launch £1bn partnership fund to build 10,000 new homes on public sector land

A private sector partnership has launched a £1bn housebuilding fund intended to deliver 10,000 new homes on public sector land across the UK.

Kier Living, part of the FTSE250 listed Kier Group, has joined forces with investment management firm Cheyne Capital’s Social Property Impact Fund, and the Housing Growth Partnership (itself a joint venture between Lloyds Banking Group and the Homes and Communities Agency) to launch the New Communities Partnership.

Described as a “unique public-private alliance” it is claimed to offer local authorities and housing associations an “innovative delivery model” for building new homes on public sector land. It is said to offer them the choice between sale and/or rental developments and “offers significant scope” for allegedly affordable development.

“We are excited by the establishment of this partnership which will focus £1bn of investment into the development of much-needed housing throughout the country,” said John Anderson, Kier Living’s executive director. “It will bring scale and momentum to Kier’s tried-and-tested mixed-tenure housing delivery model, for public sector clients across the UK who hold land but don’t have the capacity to develop new housing.

“Through this unique public private sector partnership with experienced finance and development partners Kier, Cheyne and the Housing Growth Partnership (HGP), we are collectively offering an end-to-end solution to building much-needed new homes.”

Shamez Alibhai, head of Cheyne’s Social Property Impact Fund, added: “We believe that bringing responsible private capital into the UK housing sector is necessary for tackling the increasing shortfall of genuinely affordable homes across the country. The long-term investment horizon of our socially-conscious institutional investors means that we are able to provide patient capital to work with Kier Living and the HGP in delivering a new socially-inclusive, multi-tenure building model that helps alleviate the current housing crisis.”

The new partnership claims to offer public sector organisations the freedom to call the shots on the “appropriate mix of tenure for their site”, including rental homes and homes for sale, in a model designed to meet the needs of their specific communities, without the need for grant funding.

Furthermore, it says that homes available for rent will include discounted and market-rent solutions to address housing challenges faced by key workers, the disabled and the elderly, while homes to be built for sale will include discounted sale units to help first time buyers get on the housing ladder.

It also said that it will provide public sector clients with potential scope to derive a revenue income from their land, whilst developing in a” socially responsible” way that will offer local apprenticeships, wider employment and sustainable, economic benefits for communities.

The New Communities Partnership is founded on five key principles:

·         Growth: to address a key economic and social issue, the acute shortage of housing across the United Kingdom

·         Collaboration: to partner with the public sector to build sustainable, inclusive communities where local economies and families can thrive, and which support local job creation

·         Affordability: to deliver more affordable, practical homes than conventional developments can provide

·         Responsibility: to reinvest a proportion of partnership profits in associated initiatives supporting youth, architecture, innovation and the environment

·         Expertise: to capitalise on the market leading construction and financial skills of Kier Group plc, Cheyne Capital and the Housing Growth Partnership

“The Housing Growth Partnership was formed to address the challenge of housing supply and affordability in Britain today,” said Andy Hulme, chief executive of the HGP. “Working alongside Kier Living and Cheyne Capital through the New Communities Partnership should stimulate further growth in residential development projects and enhance access to affordable housing. The alliance will also complement our core purpose to accelerate home building throughout the UK.”

Lloyds Bank Commercial Banking will provide banking services and financing solutions to the partnership.

[kirkbeeblog1-blog]

Giving European Credit its Due - By Stuart Fiertz

With continued market volatility in early 2016, the collapse in oil prices, shocking acts of terrorism and waves of migrants seeking refuge from war, at Cheyne we believe Europe deserves more credit - literally. The anticipation of a flood of credit opportunities in the euro zone has existed for several years but proved fleeting. However, we think the time is ripe for compelling and scalable opportunities in alternative credit within Europe because of the combination of well-meaning but poorly designed regulatory reforms and the fact that efforts to address the looming need to shrink the banking system have only just begun. To profit from the recent dislocation and increase allocations to Europe, investors will need to accept that we have reached the level of political and economic distress necessary to trigger effective policy responses. We think we have: European Central Bank president Mario Draghi has dusted off the quantitative easing playbook, U.K. Prime Minister David Cameron appears to be getting closer to securing sufficient concessions from the European Union to neutralize the risk of Brexit, and the EU is building fences on its external borders to stem the flow of migrants. The global financial crisis highlighted that the European banking system was far too large relative to the size of the European economy. This means that European banks remain overly reliant on wholesale funding and are too big to either be left to fail or bailed out again. Regulators have recognized this and responded with measures to force banks to shrink their balance sheets, including increased capital requirements and explicit leverage limits. Alternative credit has the opportunity to offset the withdrawal of liquidity that will result from shrinking European bank balance sheets. Consider that the total assets of U.S. banks are some $14 trillion, whereas the assets of European banks total $41 trillion although the underlying economies are approximately the same size. The transition toward alternative credit is now being supported by the EU, which has gone from vilifying nonbank sources of credit to actively promoting them. Furthermore, the European distressed corporate credit cycle is shifting toward opportunity. Post crisis, many investors thought there was going to be a fire sale of European corporate loans. This flood of sales didn't occur, as European banks proved more willing to sell real estate assets than corporate loans. One of the motivations was political pressure to safeguard jobs and avoid putting companies into the hands of private equity, which would look to rationalize operations. Another factor was the surprising growth in the European high-yield market, which allowed the orderly refinancing of most of the largest and most leveraged companies. It is also evident that European banks were not in a position to absorb the hit to their capital that would have been necessary to mark the corporate loans down to their clearing level. While still undercapitalized, European banks are today in a much improved position to sell down their corporate exposure, which will now begin to increase the supply of distressed corporate opportunities. In the wake of the crisis, the impact that unemployment rates had on forcing real estate borrowers into receivership was muted. Banks were therefore in a much better position to sharply reduce their risk appetite for real estate loans as the crisis unfolded. The most attractive opportunities can be found where the new regulatory capital regimes are most punitive and where the local regulator has a particularly negative bias. Bank loans to fund new construction, for example, are more readily available than loans for refurbishment. The opportunity to make this type of loan is underlined by the fact that the availability of credit in European real estate has been severely constrained since as far back as 2007, leaving a generous supply of assets in need of capital expenditures. What's more, there are an estimated £745 billion ($826 billion) of loans that will need to be refinanced over the next three years. It is estimated that European banks still need to work out some £333 billion of noncore real estate loans. The total of nonperforming corporate loans that are likely to be sold by European banks now dwarfs the remaining noncore real estate on bank balance sheets. It is an indication of how far attitudes toward alternative credit have changed that the Italian government recently chose to securitize £350 billion of nonperforming corporate loans rather than sell them outright. Stuart Fiertz is president of London-based Cheyne Capital Management (UK) and chair of the Alternative Credit Council of AIMA. This article is based on his findings from a recently published white paper.