Congratulations to Western Asset Management.
The US fixed income specialist has just raised enough money to participate in the US government’s Public-Private Investment Program, the PPIP.
From the Associated Press:
WASHINGTON – Investment company RLJ Western Asset Management LP has raised enough money to join with the government in buying toxic assets held by banks, the Treasury Department said Thursday.
The purchases of the soured mortgage securities and other assets in the government’s Public-Private Investment Program, or PPIP, are aimed at enabling banks to resume more robust lending to support an economic recovery.
Treasury said that RLJ Western Asset Management raised more than the $500 million minimum needed to close investment funds under the program. The company is a minority-owned partnership between RLJ Companies LLC – owned by Robert L. Johnson, founder of the Black Entertainment Television network and owner of the NBA’s Charlotte Bobcats – and Western Asset Management, an affiliate of Baltimore-based investment firm Legg Mason Inc.
Six financial companies have already raised enough money to take part in the PPIP. They are: Alliance Bernstein LP, BlackRock Inc., Wellington Management Co., Invesco Ltd., TCW Group Inc., and a partnership of Angelo, Gordon & Co. LP and GE Capital Real Estate.
The PPIP, if you can remember, is the US government’s plan to provide liquidity for banks’ toxic assets — distressed RMBS and the like — by encouraging firms (via a subsidy) to buy the stuff. When the plan was first announced in March, the Treasury said the programme could end up purchasing $1,000bn worth of toxic assets. That projection has since been downgraded to about $40bn for various reasons, one of which is the supposedly improving economy.
RLJ Western Asset Management is a good illustration of the other factors at play; For although the firm has managed to raise the necessary $500m to participate in the programme, it looks like it’s now having second thoughts. From Asset-Backed Alert:
Western Asset Management is giving thought to dropping out of the U.S. Treasury Department’s Public-Private Investment Program.
A partnership between Western and RLJ Cos. was among nine management groups selected by the Treasury in July to set up funds that would use a combination of private-sector capital and government money to buy devalued mortgage securities that have been clogging up banks’ balance sheets. But fund-raising efforts have proven harder than expected, causing Western to sour on the effort.
. . .
While the capital-raising efforts were initially expected to be a breeze, a combination of factors has dampened investor demand. For starters, prospective backers of PPIP funds are wary of working so closely with the government out of fears that political pressures might cause the rules to change or that participants might be subject to added scrutiny. Another factor: The managers were initially promising annual returns in the neighborhood of 20%. But as mortgage-bond prices have risen in recent months, in part as non-PPIP buyers snapped up securities in anticipation of the program’s launch, yield projections have fallen to about 12%. That’s not enough to entice most investors, and it especially looks like a turnoff given the eight-year lockups that PPIP managers enforce on shareholders. Several other types of funds are promising similar returns in five years or less.
On the other hand, many industry players think mortgage-bond prices are bound to fall again, as the current rally has been driven more by enthusiasm over PPIP than improvements in the underlying collateral. “There’s still a lot of pain out there,” one source said.
The PPIP: A victim of its own existence, then, if not its own success.
Related links:
Why the PPIP is making bankers squeak and squirm – Gillian Tett, FT
More than 100 fund managers apply to the PPIP – FT Alphaville
Word of the day: Lemons – FT Alphaville