Hoping to capitalize on the various structured finance growth opportunities beyond securitization, seven ABS senior executives have left BMO Capital Markets to launch Six Degrees Capital Management (SDCM).
The Chicago-based company, which launched Friday, will operate as both a CDO asset manager and a hedge fund, initially backed by $100 million in equity from an unidentified asset management company. Six Degrees hopes to raise an additional $400 million in equity this year, which it will use to invest in mezzanine and equity opportunities of all credit types. Initially, the company will look to allocate between 60% and 70% of its funds to mezzanine, debt and apportion the rest to equity, said Pete Walsh, managing partner at Six Degrees.
The goal at Six Degrees is to employ an "absolute value investment philosophy." It will invest in assets across the structured finance risk curve, putting its funds to work in asset-backed securities, middle-market loans, mezzanine and equity.
Hoping to attract permanent sources of capital, it prefers to get funding from entities that are committed to the structured finance sector. Initially, that includes institutional investors and high-net worth families.
As Walsh sees it, investors are not getting adequate compensation for the level of risk they are taking on with certain investments, including certain CDO sectors. One of the best ways to deliver attractive returns to its investors is to target middle market, non-investment grade debt and private companies for patronage, Walsh said.
"Those are things that take a little more time and you cannot leverage [them] on a massive scale," he said.
Walsh was a managing director and co-head of origination and structuring at BMO Capital Markets, along with Dave Kucera. They both reported to Jeff Phillips, executive managing director, of U.S. securitization, said a source familiar with the bank. Kucera will become sole head of origination and structuring.
BMO executives Kevin Gibbons, Scott Franklin, Bill Barbino, Tony Harris, plus Courtney and Sam Midanek, who are married, all left the bank to follow Walsh (see related Whisper' item on p.1). Six Degrees is also courting two professionals to run its New York office, although Walsh declined to name them.
The company also hired Gary Cohen, founder and general manager at online music company AOL MusicNow. Cohen's background and contacts in the media and entertainment business will allow Six Degrees to develop a stream of business for intellectual property finance.
"Gary's responsibility ... will be to spearhead our efforts in IP with a particular emphasis on media and entertainment and originate product there," Walsh said.
In its pursuit of arbitrage and novel applications of structured finance, Six Degrees will mount a serious origination platform by which it will secure suitable investment collateral. Today's structured finance market appears crowded with funds run by managers who take a purely buyside approach to supplying their funds' liquidity pipeline. Usually, that means they end up calling their former employers or their former employer's competitors, he said.
"We are not trying to be big buyers of CDO equity, other than the CDOs we put together," Walsh said. Here, he said, the Six Degrees team will employ its securitization legacy to pound the pavement, work the networks and originate its own deals.
As far as structured finance investing goes, there are few opportunities that Six Degrees will exclude. It will continue to invest in securitization transactions. It will patronize structured investment vehicles (SIVs). It also has client relationships among lenders in distressed consumer assets, so it can be a funding source in that industry too.
"If you see sectors under stress, you have got to know the people you are going deeper with," Walsh said.
The firm, however, is not inclined to function as a broker-dealer or a warehouse. It draws the line at being an index investor, preferring to innovate, Walsh said. "I'm an entrepreneur at heart, and you can only do so much in a regulated environment." he said.
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