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Western Asset Management Re-Thinking PPIP
Asset Backed Alert, Harrison Scott Publications Inc. (November 6, 2009)

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.

The Treasury program offers to quadruple the buying power of PPIP managers who raise at least $500 million from private-sector investors. So far, six of the groups have hit that threshold. It's unknown how much Western and RLJ have collected, but they're clearly below the minimum.

RLJ's stance is unclear. The two other managers that have yet to clear the half-billion-dollar mark, Marathon Asset Management and Oaktree Capital, each expect to hit their targets soon.

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.

Western might also have been hindered by past run-ins with pension systems, a group of investors that have accounted for a large portion of backing for other managers' PPIP funds. Indeed, a number of pensions, including Calpers and Fresno County Employees, have expressed disdain over lower-than-expected returns on various accounts with Western in recent years. And Contra Costa County Public Employees went a step further last year by removing the Pasadena, Calif., firm from a $150 million investment mandate.

The firms that have reached the Treasury's capital-raising minimum also encountered difficulties, and some had to prop up their efforts with contributions from other funds they run. Meanwhile, some of the managers that haven't qualified for matching Treasury support yet have been trying to entice backers by offering them co-management roles.

The latest management group to hit the Treasury's fund-raising threshold was a partnership between Angelo Gordon & Co., GE Capital Real Estate, CastleOak Securities and Park Madison Partners. They made the cut Oct. 30.

In the preceding months, five other PPIP groups raised about $3.6 billion of private-sector equity, which has been matched dollar-for-dollar by the Treasury. The government has also thrown in $7.2 billion of debt financing. Those groups are: AllianceBernstein, working with advisors Greenfield Partners and Rialto Capital; BlackRock; Invesco; TCW; and Wellington Management. The first of those shops started investing about two weeks ago, which was nearly two months later than initially expected.



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