The CDO equity fund has a target size of €100 million and expects to have its first closing in the first quarter of next year. The €75 million ABS equity fund will debut in the third quarter of next year, according to Jeroen Bakker, head of ABS/MBS investments. He said there are only a handful of similar funds in Europe.
The CDO fund will ramp up assets including first-loss pieces from CDOs of residential and commercial mortgage-backed securities, bank loans and trust preferred securities. About half the assets will be sourced from the U.S. and the other half from Europe, with a slight skew toward U.S. collateral since there is more product available. Faxtor is firming up investor commitments before the launch of this fund and is targeting buyers in Europe and Asia.
The ABS fund will invest in European RMBS and CMBS assets denominated in euros and sterling, focusing on unrated junior pieces, banks' reserve funds and the rights on excess spread. Faxtor could buy up to €15 million in a single deal. Bakker said investors favor the protection offered by mortgages, noting, "Not only does the borrower have to default, but the property has to be sold at below-market value before the investor is negatively impacted." The manager will start buying assets soon and only plans to approach investors once the pool has reached its target size.
Faxtor is launching the funds now for two reasons. First, the risk-return on equity tranches has improved relative to subordinated and mezzanine tranches and investors are exhibiting a lot of interest in the credit class. Bakker estimates the CDO equity fund will return roughly 14%, whereas a new CDO mezzanine fund would be hard pressed to deliver 9%. Second, supply of equity tranches has increased as banks come under pressure from new European accounting rules due to take effect in January 2005.
Although this is the first time Faxtor will invest in equity tranches in Europe, the firm has been buying RMBS equity in the U.S. since 1999 and launched a subordinated RMBS fund in 2002. However, equity tranches in the U.S. tend to be a lot smaller than in Europe, and that fund is only $7 million in size.
