04/20/2012

Fund Managers Pitch Cluster of Vehicles

Apollo Global, Commerce Street Capital and Eton Park Capital are separately raising money for their latest structured-product funds.

Apollo’s vehicle, Stone Tower Structured Credit Recovery Fund 2, invests mainly in the mezzanine pieces of collateralized loan obligations — both newly issued and on the secondary market. The Commerce Street and Eton Park funds, meanwhile, would buy pieces of collateralized debt obligations backed by trust-preferred securities.

Apollo’s fund actually was launched late last year by Stone Tower Capital, shortly before Apollo purchased the firm and brought over its team at the start of 2012. The effort entered something of a lull after that, however, and it only now is becoming clear that Apollo plans to continue raising capital. It so far has collected about $100 million, out of a targeted $400 million.

The first version of the recovery fund launched in 2009 at Stone Tower, also with $400 million. It imposed a four-year lockup on investor capital, but wound up returning all of its equity in two-and-a-half years while delivering an internal rate of return of about 25%. Along with CLOs, the vehicles buy devalued asset- and mortgage-backed securities.

There’s no word on how much Commerce Street is seeking to raise for its fund. The Dallas firm already runs two vehicles that buy so-called Trups CDOs, the newer of which stopped taking capital from investors in 2010.

Eton Park’s fund focuses on buying the senior-most slices of Trups CDOs. The offering would be separate from the New York firm’s Eton Park Credit Opportunities Fund, which invests in similar securities.

The bonds targeted by Eton Park are changing hands on the secondary market at an average price of 60 cents on the dollar, a level the firm views as undervalued. “Eton wants to push further into the space because there is still a lot of upside in the Trups market. CLO paper has cratered and come back. Trups CDOs cratered but haven’t come back,” one source said.

Trups resemble equity but are treated as debt for accounting purposes, meaning issuers can book interest payments as expenses. They once were a common capital-raising tool for mid-size banks and insurers, but vanished amid the financial crisis. Lately, investors have been showing more interest in the instruments, and CDOs backed by them, as credit quality has risen among banks and asset performance has improved.

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