Dresdner Kleinwort Wasserstein is working on what will be the first hybrid securitization that provides investors with exposure to hedge funds and private equity returns. Investors would gain exposure to hedge funds for the first four or five years of the deal with the money being transferred to private equity afterward through bonds backed by the assets. Mehraj Mattoo, managing director and global head of the alternative investment group in London, said the problem with private equity investments is they take several years to start producing high returns as the capital is held on deposit until it is drawn down. This structure gets around that problem by investing the money in hedge funds until it is needed.
A rival structurer said it has looked at this type of deal and decided against it because of the difficulty in finding investors. He said private equity and hedge fund investors are often different groups and it is hard to get them to cross over. However, he added DrKW may have a large enough distribution network to sell the product to retail investors.
The underlying hedge funds will be diverse in terms of style and liquidity to ensure DrKW can move money out of the funds and into private equity when it needs to. There will be two sets of investors, those who invest in pure private equity and those who take the combined hedge fund and private equity exposure. Mattoo said the firm will need to raise four times the amount of capital from pure private equity investors in order to guarantee the money is there to be drawn down when the private equity funds demand it.
DrKW is also structuring its first public collateralized fund obligations (CFOs) and expects to issue two securitizations by the third quarter. The deals will be approximately USD200 million each with a maturity of five years, according to Mattoo.
The CFOs will likely be split into two tranches, an equity tranche making up around 30% and a debt tranche, said Mattoo. However, it may also add a mezzanine tranche which will be issued as credit-linked notes.
Mattoo said the firm has already structured privately placed CFOs, but declined further comment (DW, 6/17).