Lord Capital Partners, an affiliate of Lord Securities, is raising capital for a novel alternative investment fund that will invest in notes issued by special purpose entities (SPEs). The fund, Lord Capital Partners, will invest $100-150 million in expected loss notes, a new type of security to be issued by commercial paper conduits based on the equity or first-loss piece of their capital structure, said a Lord Capital official. The issuance is expected because of new accounting definitions proscribed by the Financial Accounting Standards Board. Ben Abedine, cfo at Lord Securities, said only the firm was working on the fund. He referred calls to Craig Shallcross, a partner at the firm who manages the fund, who declined to comment.
In January, FASB approved a rule applicable June 30 that limits the off-balance sheet treatment of commercial paper conduits, forcing the banks that administer those SPEs to consolidate or put them back on their balance sheets. Now that the SPEs are on the banks' balance sheets, the firms are looking at ways to remove them. To meet the new accounting definitions, a bank sponsoring a conduit that wants to push the SPE off its balance sheet may do so only if it can sell the risk of expected losses. One way for banks to keep SPEs off their balance sheets is for the SPE to issue expected loss notes, which will transfer the risk to investors. Investors in those notes get paid a substantially high yield for investing in riskiest piece of the conduit, the official said.
So far no money has been raised for the fund because the bulk of the note issuance should take place around September for accounting reasons, the official said. "They are now looking at ways to deconsolidate before the next reporting cycle in September 30," he said. The fund is being marketed to institutional investors, mainly insurance companies, mutual funds, fund management companies and hedge funds, said the insider. It is being positioned as more advantageous than a private equity fund because it provides a current return in the form of a coupon as opposed to the prospect of future capital appreciation, the official said.