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Vranos’s Ellington Financial IPO Raises $101 Million

Ellington Financial LLC, the mortgage-backed bond fund run by Michael Vranos, raised $101 million in its second attempt at an initial public offering.

The company sold 4.5 million shares for $22.50 each, after offering them at $22 to $24 apiece, according to Bloomberg data. Old Greenwich, Connecticut-based Ellington Financial intends to use the proceeds to buy the types of mortgage bonds that helped cause the biggest housing bust since the Great Depression.

Vranos, the former head of mortgage-securities trading at Kidder Peabody & Co., completed the offering 10 months after canceling Ellington Financial’s first IPO attempt, which had sought $208 million. This time, the fund had commitments for at least half the shares before bankers began marketing the deal two days ago, according to a person familiar with the sale.

“It seems like it might be almost pre-sold,” Nick Einhorn, an analyst at Greenwich, Connecticut-based Renaissance Capital LLC, which has studied IPOs since 1991, said before the offering priced. “If you believe in the management team, it probably means they’d have the ability to drive higher returns if they can execute their strategy.”

December Deal

Deutsche Bank AG of Frankfurt led the sale. Zurich-based Credit Suisse Group AG, Ellington Financial’s lead underwriter in December, was dropped from the deal, according to the company’s filings with the Securities and Exchange Commission.

As much as 95 percent of the proceeds will be used to buy securities tied to subprime, Alt-A, or prime home loans that lack guarantees from government agencies such as Fannie Mae. The purchases would add to the $246 million that the fund held in such securities at the end of June.

Ellington Financial had a so-called book value, or its assets minus liabilities, of $25.31 per share as of Aug. 31, according to the filing. The midpoint offer price of $23 a share would have been a 9.1 percent discount to the fund’s net assets, data compiled by Bloomberg show.

The average U.S. real estate investment trust that buys mortgages is valued at 0.98 times its shareholder equity, data compiled by Bloomberg show.

While the IPO gave buyers the opportunity to purchase a stake in Ellington Financial at a discount, institutional owners may still assign a lower value to Vranos’ fund.

Relative Value

Bill Miller, whose $1.9 billion Legg Mason Capital Management Opportunity Trust owns a 21 percent stake in Ellington Financial, valued his 2.5 million-share holding at $49.375 million, or $19.75 each, as of June 30, Baltimore-based Legg Mason Inc.’s filing with the SEC showed.

That’s 20 percent less than Ellington Financial’s valuation of $24.56 a share on the same day, according to its filing.

FBR Capital Markets Corp. of Arlington, Virginia, which owns a 12 percent stake as Ellington Financial’s second-largest outside investor, valued its 1.44 million-share stake at $15 each at the end of June, its SEC filing showed.

Ellington Financial was established in August 2007, the month that the credit crisis began, after raising $239.7 million in a private sale to institutional buyers.

From its inception through the end of 2008, the fund returned 0.52 percent, before a 43 percent gain last year. Ellington Financial has returned 7.3 percent this year through August, compared with the 7.4 percent gain, including dividends, for the BBREIT Mortgage Index, data compiled by Bloomberg show.

Manager Performance

“Performance over the past two years will be critical to gauging a mortgage manager’s ability to perform over the next two years,” said Michael Youngblood, a mortgage-bond analyst for more than two decades before co-founding Bethesda, Maryland- based hedge fund firm Five Bridges Advisors LLC in 2008.

Ellington Financial acts like a hedge fund by using borrowed money to magnify bets and increase returns, charging fees based on performance. The fund had borrowed $1.45 for every dollar of capital at the end of June, the filing showed.

Hedge funds are largely unregulated investment vehicles whose managers can trade any asset, aim to make money regardless of whether markets rise or fall and participate substantially in profits from money invested.

Vranos, 49, came to Wall Street more than two decades ago after winning the 1981 teenage Mr. Connecticut title as a bodybuilder and weightlifter and graduating with a magna cum laude degree in mathematics from Cambridge, Massachusetts-based Harvard University in 1983.

‘Captain Iron’

He made Kidder one of the biggest underwriters of mortgage bonds in the early 1990s after being put in charge of the mortgage desk. The unit earned hundreds of millions of dollars under Vranos, in some years bringing in as much as half of the firm’s profit.

Vranos, who earned the nickname “Captain Iron” at Harvard for the long hours he spent in the gym, once stripped to the waist and performed muscle poses to catcalls from the trading floor at Kidder, according to a Wall Street Journal story from Dec. 29, 1994.

He left Kidder in 1994 to start Ellington Management Group LLC, named after the Connecticut town where he grew up, helped by $100 million from Ziff Brothers Investments.

“He’s respected and he’s thought to be an expert in the area and would bring something to the table that perhaps others don’t know,” said Barry James, who oversees $2 billion as president of James Investment Research Inc. in Xenia, Ohio. “Wall Street always likes to follow folks who have success and who are well respected, so I would think that from that perspective, that’s a plus in his category.”

IPO Market

Ellington Financial’s offering comes after the market for U.S. initial sales started to rebound last month, with nine of 10 IPOs posting gains, according to data compiled by Bloomberg.

At least 47 companies have postponed or withdrawn initial offerings in the U.S. this year amid speculation that the recovery from the longest recession since the Great Depression is deteriorating. Linc Logistics Co., the Warren, Michigan-based logistics company, delayed its $147 million IPO yesterday, according to Bloomberg data.

Daqo New Energy Corp. raised $76 million selling 8 million American depositary receipts at $9.50 each, according to a statement today. The Chongqing, China-based maker of polysilicon materials for solar panels had offered the shares for $10.50 to $12.50 each, an SEC filing showed. Daqo gained 7.9 percent to $10.25 in New York Stock Exchange trading today.

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