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"The objective is to preserve capital and to deliver stable, predictable resilient income. The value proposition of Volta is about taking advantage of what is going on in the structured finance market"
Pierre-Emmanuel Juillard, Axa |
Ever since the launch in December 2005 of Queen’s Walk, managed by Cheyne Capital, which raised €225 million, the hype behind closed fund structures has been tempered by concerns about possible drawbacks.
Permanent capital vehicles are a mix of CDO and fund management approaches. Importantly they have attracted investors that have traditionally been less comfortable with structured finance as an asset class. The last deal to launch – Volta, which is managed by Axa IM – was the biggest so far. Lead managers Citigroup and Goldman Sachs raised €300 million.
"It’s a diversified permanent capital vehicle – and as far as we know it’s the first of its kind. The objective is to preserve capital and to deliver stable, predictable resilient income. The value proposition of Volta is about taking advantage of what is going on in the structured finance market," says Pierre-Emmanuel Juillard, head of Axa IM’s structured finance division.
Disintermediation
What Juillard is referring to is the increasing disintermediation of assets that were formerly banked. Thus Volta will target a diversified pool of structured finance assets, on mainly levered loans, CDOs, ABS – mortgage and consumer assets – as well as investment-grade and infrastructure assets.
"We have tools to extract the maximum value out of disintermediation with optimized risk management techniques. As an example, through securitization you can move up and down the capital structure and mitigate risk across credit cycles and that has tremendous value. Therefore you can buy equity tranche to get non-recourse leveraged exposure or the triple A to get delevered exposure on one opportunity. You don’t have to buy an opportunity outright, you can reshape the risk reward and that has added a lot of value for investors," says Juillard.
In the present uncertain environment investors have to feel very comfortable with Axa as a manager because it enjoys some latitude in its investment decisions. It appears that they do. It was launched at the start of the year at €10 but slipped quickly to €9.50 – where it has remained. But the price action on Queen’s Walk in the past three months has been disappointing. Despite the fact that the vehicle has only 12% exposure to the US, it appears that investors have taken a dim view of any exposure to US residential mortgages. The level has fallen from €10.10 to €7.42. Queen’s Walk has a mono-strategy approach, buying mostly deeply ABS subordinated assets. Caliber – which has almost half of its portfolio in US sub-prime and is run by Cambridge Place, has also suffered a precipitous drop, from $8.73 in February to $5.75 in March.
Bankers say that a number of permanent capital vehicle deals are expected this year – a key question is whether or not the concerns about certain structured finance assets will feed through to investor appetite for them.
Juillard believes that multi-strategy vehicles are the best approach. Volta will target the new asset classes that are being disintermediated such as loans and infrastructure. Because Volta can target various assets and any part of the capital structure, it will be able to optimize value and mitigate risk. "Most importantly that as a manager we actively manage and bring additional alpha around those opportunities," says Juillard. And if you think that those things are critical you have to do multi-strategy permanent capital vehicles. I have to say we’ve been very sceptical about mono asset class permanent vehicles. The product can become less fashionable or suffer from a loss of liquidity.
"So far most of our products have been reserved for the very happy few, very sophisticated investors. Here we can broaden the scope of our investors and bring that value proposition to mutual funds and private banks," says Juillard.
Racy
"The portfolio, as you could expect, is a bit racy," says a structured finance asset manager. "Some of the residuals they have aren’t what I would call for widows and orphans. I would say that to get comfortable with those assets they had to do a fair amount of modelling work. It’s also interesting the amount of cash they have available."
But investors are hunting for alpha. Most equity stocks are not yielding much, let alone fixed income. The target for the first full financial year is a 9.5% dividend on Volta. A key advantage of these vehicles is that investors do not have accounting headaches. Furthermore, investors get a quote every day. So it is easy to monitor and evaluate investments.
"We have not taken the easiest route – because when you take a multi-strategy route you have a lot to demonstrate – the value proposition of every asset class. I think people have been concerned by mono-strategy permanent capital vehicles. Because when they are in fashion the market price goes up but when it goes out of fashion or there are no more opportunities they can go down quite significantly. At least here we can deal with this issue because we can always demonstrate that in structured finance assets you always have an opportunity somewhere," says Juillard.