Riding the tide of a growing sector, the distributions finance team at Putnam Lovell Securities is looking to nearly double its year-on-year proceeds associated with mutual fund fee securitizations and other asset management-related products.
Specifically, Putnam Lovell has been a leader in financing the fees associated with variable annuities, already completing $350 million worth of deals. According to Senior Vice President Mike Llodra, the sector shows as much or even more promise than the more spotlighted mutual fund fee market.
"What's interesting about the variable annuity market, if you look at the potential volume of financing requirements, it could theoretically be substantially larger than the B-share market," Llodra said.
He estimates the financing requirements on the variable annuity side could be as much as 30% greater than on the mutual fund side.
Variable annuities are investment structures very similar to mutual funds, with asset-based sales charges and what are called M&E charges, or mortality expense charges.
"Think of it as a mutual fund in an insurance wrapper, structured to provide the purchasers of contracts with tax deferral," said Paul Fishbin, who specializes in financing the product. Fishbin is also a senior vice president with Putnam Lovell.
Like with individual retirement accounts (IRAs), variable annuities contain redemption fees - meaning that all the dividends and capital gains are tax deferred until withdrawn.
Though compared to the attention 12b-1 fee securitizations have drawn, securitization associated with variable annuity fees have been relatively behind the scene - however, Fishbin has been financing the product since 1996, when the first 12b-1 fees were securitized.
The Team
Putnam Lovell is an investment bank that has been associated with the financial institutions industry since 1987, with a core focus on the asset management industry. The firm has been at the top of the league tables for M&A activity in that sector, Llodra said.
The distributions finance team, which was formed in 1996, is made up of five senior officers, all formerly at Citicorp.
Heading the Putnam Lovell group are managing directors Bill Henson and Jack MacDonald. Robert Fleischer, along with Llodra and Fishbin, is on board as a senior vice president.
"This team was the first to really market the B-shares in the capital markets, and to place these deals," Fishbin said.
Because they come from a capital markets-oriented background, Putnam Lovell's philosophy has always been geared towards securitization. Further, Putnam Lovell is currently the only player in the distributions finance sector that agents its own deals without the use of another investment bank, according to Llodra.
"We're the only institution where the team is involved throughout the process, from origination, to distribution, to surveillance," Llodra said.
Overall, Putnam Lovell's strategy is to offer its clients a full line of services, with a concentration on the distribution of investment products.
"The approach that we have historically taken is that distribution finance is part of a whole parameter of issues facing the financial officers and chief executive officers of these companies," Fishbin said. "Things that we do tend to have more strategic focus while preserving the attractive risk/reward characteristics of the asset class."
Additionally, the firm will look at other products such as closed-end offerings, or any structure that involves financing capital expenditure: this includes issuance of non asset-backed debt.
"The firm also has capital-raising abilities outside just the debt market - private and public equity for example," Llodra said.
Adding to its long-standing branded asset-management research team, Putnam Lovell recently ramped up its sales, trading and capital-raising efforts. The firm has grown from 25 people in 1996 to more than 100 presently. The most notable hires include Jack Baker, Kathy Smythe, Rhonda Rosen, and Al Capra.
Baker, who came over from Furman Selv, is a well known player in the equity markets. Smythe, named a managing director in the banking and finance group, came over from Montgomery Securities. Rosen and Capra, both managing directors with expertise in insurance products, came from CIBC World Markets and Keefe, Bruyette & Woods, respectively.
The Pipeline
Issuing at least once a quarter, Putnam Lovell is projecting six transactions for $700 million combined this year, compared to five transactions for $400 million in 1999.
In March, Putnam Lovell closed a $125 million variable annuities deal, structured as a single tranche with an investment-grade rating.
Most recently, the firm closed a $100 million multi-tranche mutual fund fee securitization. The transaction, which closed this month, marks the second time a 12b-1 deal included Canadian assets in the pool, according to Llodra. The Canadian assets are very similar to the U.S. B-share assets, he explained.
"More significantly, whether it's the second or third transaction is that I would expect that there will probably be a sprinkling of those assets in our tranches going forward," Llodra said. "It provides a nice diversification benefit to our investors of both shareholders and collateral."
Though Putnam Lovell is increasing its penetration into the sector, don't expect to see too many monster-size transactions down the line, as one of the firm's strategies is frequent, reasonably sized deals.
"We've tried to keep it at a level where we retain the interest of our core investors," Llodra said. "We'll increase the liquidity of the deals by issuing multiple notes and issuing more frequently."
As for the future, Llodra and Fishbin see an expansion into other asset management-type products.
"Previously most of the volume has come U.S. B-share-related, and U.S. annuity products, but there are some extensions that have similar analytical characteristics that we're likely to see over the next few years," Llodra said. - MG
