Pamplona Capital Management LLP, the asset manager founded by former Alfa Bank Chief Executive Officer Alex Knaster, plans to raise as much as $300 million for a new fund to invest in structured credit in Europe.
The Debt Partners II fund is targeting an annual return of between 15 percent and 20 percent by buying BB to AA rated portions of U.K. mortgage-backed securitizations and European collateralized loan obligations, according to Zoran Kozic, a partner at London-based Pamplona.
Pamplona, which manages $6.5 billion, is starting the new credit hedge fund as European banks find themselves under growing pressure to offload structured-finance assets blamed for hastening the 2008 collapse of Lehman Brothers Holdings Inc. European lenders have pledged to cut more than 950 billion euros ($1.3 trillion) of assets over the next two years to reduce the capital they’d otherwise need to hold against them.
“We see great opportunities in structured credit which is an area most banks don’t want to be involved in any more,” Kozic said in an interview.
Investors focusing on buying banks’ corporate loan portfolios at distressed prices will, on the other hand, be disappointed, he said.
“We think the trillion-dollar opportunity some people talk about on the sales of corporate loan portfolios from banks is grossly exaggerated,” Kozic, 42, said. “Corporate lending is a business banks will want to keep and it doesn’t make sense for them to sell the loans at capital-destroying prices.”
The existing $400 million Pamplona Credit Opportunities Fund, managed by Yves Leysen, former head of European fixed-income at Bear Stearns Cos., generated an average net annual return of 10.6 percent since it started in 2008, and earned 2.09 percent last month, according to the company.
Pamplona’s looking to create profit by buying mortgage-backed securities at big discounts to liquidation prices or buying real-estate loans from banks and then restructuring the debt with the borrowers, Kozic said. European banks have cut back on lending after incurring 526 billion euros of losses since the third quarter of 2007 in the credit crisis and ensuing property slump, according to data compiled by Bloomberg.
Relative yields on BBB rated five-year securities backed by commercial mortgages in Europe including the U.K. have risen to 1,900 basis points, from about 1,400 six months ago, according to Citigroup Inc. data. Top-rated CMBS note spreads narrowed to 450 basis points, from 500 basis points.
Borrowers of loans backed by offices, warehouses and other commercial properties face a funding gap of about 90 billion euros over the next three years, according to a Moody’s Investors Service estimate in December.
“After the price declines, we believe pension funds will shift their investment focus to real-estate from corporate fixed-income in the next two to four years, and mortgage-backed bonds are well positioned to benefit from that change of allocation,” Kozic said.
Pamplona also sees value in AA, A, and BBB rated European CLOs after prices fell in the past six months amid the sovereign debt crisis, he said.
Spreads on the BBB rated portions of European CLOs have widened to 1,615 basis points from 1,025 at the beginning of August, Citigroup data show. By comparison, spreads on similarly rated U.S. CLOs increased to 775 basis points from 700. Prices have fallen to 51 cents on the euro from 65 for BBB rated tranches in Europe. A basis point is 0.01 percentage point.
Pamplona’s new fund will have a four-year investment period, and will waive its incentive fee if it returns less than 8 percent, said Kozic, whose hobbies away from the markets include ownership of the Slough Jets ice hockey club in Slough, England.
Pamplona was set up in 2004, a year after Knaster retired from Alfa Bank. It has a private-equity business, a fund of hedge funds and two credit funds, according to its website.