Michael Cagney, a hedge-fund manager backed by China’s largest social-networking website, is starting a series of funds to help students at Ivy League and other top U.S. colleges refinance their loans at lower rates.
Cagney has registered SoFi Capital Advisors LLC with the U.S. Securities and Exchange Commission to manage funds that will finance loans at top colleges, including six members of the Ivy League. Each of the 18 funds will be dedicated to one school and will seek money from institutional investors as well as alumni of that school, according to company officials and regulatory filings.
The firm plans to offer investors returns that are a multiple of the 3.97 percent yield they would currently get from comparable investment grade corporate bonds. Social Finance will offer lower interest rates than the federal government and many banks while seeking to minimize defaults by focusing on top schools and having students borrow from their own alumni through funds set up specifically for their school.
“As I understand it, the schools they are targeting are schools where students tend to have better job prospects and have higher salaries coming out of school,” said Judah Kaplan, co-founder of Great Neck, New York-based Cuzco Capital Investors Fund LLC, which invests in delinquent consumer debt, adding he did not have specific details of SoFi’s strategy.
In addition, by having alumni as lenders, the funds rely on the same kind of “moral suasion” as microlending, said Kaplan, a former director of liquidity risk oversight at mortgage lender Fannie Mae.
SoFi, based in San Francisco, is a unit of Social Finance Inc., co-founded last year by Cagney and four other people to capture a piece of the nation’s $1 trillion student loan market. Social Finance has about $130 million of student loans outstanding or in the works and plans to originate $1 billion to $1.5 billion of such debt next year, Cagney said.
The funds will raise money mainly from accredited investors and will have a minimum investment is $100,000, though SoFi Capital can accept lower amounts.
Social Finance’s strategy is premised on an anomaly of the student loan market: the federal government charges the same interest rates at every school, even though some have much higher default rates on student loans than others. Cagney and the firm’s other co-founders, three of whom are fellow alumni of Stanford University’s Graduate School of Business, decided to develop a lower-cost formula for lending to those who presented less risk, said Saturnino Fanlo, the chief financial officer of SoFi Capital and former chief executive officer of KKR Financial Holdings LLC. (KFN)
Under its Stafford loan program, the U.S. Department of Education provides a maximum of $31,000 to undergraduates who are dependent on their parents, charging 6.8 percent annually for unsubsidized loans and 3.4 percent to students who qualify to borrow the money interest-free while in school.
Social Finance offers rates as low as 5.99 percent as an alternative to the unsubsidized Stafford loans and federal PLUS loans, which allow graduate students and the parents of undergraduates to borrow additional money from the Education Department at 7.9 percent. The firm primarily lends to graduates who want to refinance their college debt, though it also lends to people who are still in school.
Social Finance raised $79 million by selling stock in September to a group of investors that included Baseline Ventures and Renren Inc. (RENN), a Chinese social-networking site that now ranks as the largest shareholder in Cagney’s firm with a stake of 25 percent to 50 percent, according to a range provided in regulatory filings. After the stock sale, Social Finance decided to sell the student loans that the firm originates to funds backed by university alumni and institutional investors instead of holding the debt on the company’s balance sheet, Fanlo and Cagney said.
“The specialty-finance model is a massively balance-sheet- intensive model,” Cagney said, explaining why the company shifted to asset management. The new approach “aligns us with our investors and provides a lot more flexibility with how fast we move and how aggressive we can be in getting programs set up.”
Before starting Social Finance, Cagney, 41, oversaw the derivatives desk at Wells Fargo & Co. (WFC) and then started Cabezon Investment Group LLC with backing from the family of J. Paul Getty, the late founder of Getty Oil Co., according to SEC records. He remains an owner of Cabezon, a San Francisco-based adviser that managed $243 million for macro hedge funds and high-net-worth individuals as of Jan. 31, the SEC records show. Macro funds try to anticipate global macroeconomic trends.
SoFi Capital on Oct. 31 incorporated funds dedicated to backing loans for students at Duke, Harvard, Rice and New York universities and the Massachusetts Institute of Technology, according to Delaware state records. The following month, the firm received SEC approval to operate as an investment adviser, according to agency records, and created separate funds for 13 more schools, including Brown, Columbia, Cornell and Stanford universities, Dartmouth College, and the Universities of Chicago, Pennsylvania and Virginia.
SoFi plans to set up dedicated funds for additional schools, Fanlo said. SoFi isn’t restricting its investment funds to elite universities, Fanlo said, adding that the firm’s parent, Social Finance, currently makes loans available at about 80 schools.
SoFi’s loan portfolio has an average coupon of 6.1 percent, Cagney said, adding that the funds can use a “modest” amount of leverage, or as much as 50 percent of their assets under management. The student loans have maturities ranging from 5 to 15 years, Cagney said. Corporate bonds that mature in 15 years currently yield about 3.97 percent, according to Bank of America Merrill Lynch index data.
“What the investor is getting,” Cagney said, is “a high- yield type return for a very-high-quality underlying asset.”
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