Recovery programs offer treasure trove
By Arleen Jacobius
Mar. 9 (P&I) -- Alternative investment managers are turning to Washington for some of their best portfolio opportunities.
The potential investments range from downtrodden commercial mortgage-backed securities to bank loans to venture capital. Those able to take advantage of some of those options - most of which still are in the planning stages - include hedge funds, private equity firms and real estate investment managers.
In trying to jump-start the economy, the U.S. government could create a truckload of investment opportunities for managers. However, most investors are remaining parked at the curb until details and timetables for many of these programs become available.
"In alternatives, everyone is pretty much on the bench watching March Madness and will wait for some clarity on all of this," said Stephen L. Nesbitt, chief executive officer of Cliffwater LLC, a Marina del Rey, Calif., alternatives investment consultant.
Scattered amidst the federal economic recovery initiatives are potential treasures for alternative investment managers. Here's a sample:
- A dramatic of expansion of the Term Asset-Backed Securities Loan Facility to $1 trillion from $200 billion, or TALF, designed to provide government debt for could restart the commercial mortgage-backed securities market. The government will offer private equity, hedge fund and other investors, low-interest loans and will assume some of the downside risk. The program, which was announced by the Federal Reserve and Treasury Department last November and limited to small business loans, now will be expanded to include AAA-rated asset-backed securities, such as commercial mortgage-backed securities, as well as private-label residential mortgage-backed securities, and other asset-backed securities.
- The development of a Public-Private Investment Fund by the Treasury Department would give investors alternative investment managers and other investors low-interest financing to buy bank loans while the PPIF would assume much of the risk.
- The $787 billion stimulus package provides funding for various industries that would be a boon largely for private equity funds' portfolio companies, especially those in renewable energy sources, health care and infrastructure and technology.
- President Barack Obama's $3.6 trillion budget restores and expands investment in science, research and technology, which could benefit venture capital investment managers. The budget would provide research dollars for government entities including the National Institutes of Health and the Department of Energy to "turn new medical breakthroughs and new discoveries" into "entire new industries," the president said.
- The stimulus package includes a cancellation-of-debt provision that would help REITS and real estate investment managers defer certain taxes over five years. The provision would allow investors to renegotiate lower mortgages on their commercial properties and then buy the debt back from banks at a lower cost without incurring an immediate large tax bill on the savings. This year alone, about $400 billion in commercial real estate mortgages are coming due, according to data from the National Association of Real Estate Investment Trusts, Washington.
Opportunities ahead
"I think there will be investment opportunities with what Washington does. This will be either with programs like TALF or with policy changes in regulation or legislation," said Mario Giannini, chief executive officer at Hamilton Lane, Bala Cynwyd, Pa.
"For example, if there are dramatic changes to energy policy, I would expect it will drive investment in those areas that are favored. I think it is too early right now to know what the changes are going to be," Mr. Giannini added.
Investment trade association executives are huge boosters of a number of the recovery measures.
"TALF has the potential to be very valuable for the real estate marketplace by jump-starting the CMBS market," said Ronald C. Kuykendall, vice president, communications, at NAREIT.
Last year, there were $12 billion in new CMBS issued, vs. $230 billion in 2007. All of that $12 billion was issued in the first half of 2008, according to NAREIT's analysis of data from Commercial Mortgage Alert , an industry publication.
With the CMBS market dead, billions of dollars of commercial loans can't be refinanced "unless property values return" and return to normal levels, said Thomas J. Barrack Jr., chairman and chief executive officer of Colony Capital LLC, a Los Angeles real estate opportunity fund management firm.
Venture capital fund managers, especially those in the clean-technology, health-care, technology and broadband sectors, are poised to reap benefits from the various federal measures, said Mark Heesen, president of the National Venture Capital Association, Washington. What's more, the government's expected investments under the stimulus law in basic research and development would fill a need left by corporations conserving cash rather than spending it on research and development.
"No one is doing basic R&D," Mr. Heesen said. "Science is cool again."
Mr. Obama's budget also includes a zero capital gains initiative for small companies, which would be a big help for venture capital portfolio companies. Mr. Heesen called that a "step in the right direction."
Direct benefit
Doug Dossey, managing director of New York midmarket private equity firm FdG Associates LLC, said many of his firm's portfolio companies would benefit directly from some of the stimulus package provisions. For example, one portfolio company that produces energy-efficient vinyl windows could get a piece of some $5 billion to $8 billion set aside to make federal government buildings "green." Another of his portfolio companies, a health-care company, could benefit from set-asides to update medical records.
Despite the good news that looks to be coming out of the capital, some see the potential for bad news as well.
For one, alternative investment industry insiders are worried about increased governmental regulation."We're emerging from a period of incredible deregulation and a crisis stoked by lax or insufficiently funded regulators," and there are public cries for overhaul of the regulatory structure, said Josh Sternoff, partner in the New York office of law firm Paul, Hastings Walker LLP.
Regulators could soon turn their reform efforts to parts of the derivatives market and the private equity and hedge fund industries, he said.
Already, the bounty of economic recovery measures contains one large lead nickel, industry leaders say: the increased tax on carried interest. Mr. Obama's budget proposes an increase in taxes on carried interest or profits by 2011 as ordinary income instead of the lower capital gains tax. Some of the biggest private equity and real estate money managers have been campaigning against the proposal for a couple of years.
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