In the mid-1980’s to the early 1990’s, Tom Capasse and Jack Ross worked together at Merrill Lynch; the duo handled and initiated some of the earliest investment transactions that helped to establish the securitization market. More importantly, the asset-backed securities (ABS) “pioneers” linked up to create the financial services and management conglomerate’s ABS Group.

Years later, Ross proved to create his own specialty broker/dealer Licent Capital and Capasse spent some time managing principal financial groups at Macquarie Securities. Despite these personal achievements, the securitization market team coupled again in late 2004.
“Jack called me up and said there was an opportunity,” Capasse said in an interview last month. That opportunity was their joint venture Waterfall Asset Management (WAM). After talking to a number of seeding firms, they connected with M.D. Sass, which now as an affiliate of the New York-based investment management firm, WAM offers high yield ABS strategies.
At its birth in 2005, WAM partnered with M.D. Sass to offer its first opportunistic ABS distressed hedge fund, the “Waterfall Eden Fund,” which targeted residential mortgage, home equity ABS and other similar strategies.

Through these first steps, the firm has flourished into a 30-person effort, where 20 focus on investment management and analysis, and the remaining personnel are dispersed in legal, marketing finance and investor relations. Presently, it provides two primary strategies: high yield ABS bonds and residential and small non-performing loans.  
Capasse explained the first piece of the high yield and distressed ABS pie is to look at bonds in the secondary market, on a relative basis across all 60 ABS sectors. Alternately, the former Nomura Securities and Greenwich Capital official added that the firm initiates “direct origination” where it approaches issuers directly to allow them to “participate in the construction of a securitization.”
“As opposed to a one-trick pony mortgage CDO manager,” Capasse explained, “we tend to look at the world in relative value basis across all ABS sectors.”
The other side of the “house” works to basically capitalize “on the single largest distressed opportunity globally right now, which is the residential non-performing loan market,” the WAM principal said.
Furthermore, as evidence of its separation from the credit manager norm, Capasse said that in its research, the firm actually talks and establishes relationships with services in loan pools rather than relying on the industry’s generic statistical tools.
“We knew about the foreclosure crisis that was pending three to four weeks before it hit the press, and reason for that is because we have relationships with servicers and we knew these problems were emerging,” he said. “So rather than us looking at a mortgage pool and running in third-party information provided with a 60-day lag, we are actually in front in some of the issues, in particular mortgage credit.”
Also to note, Capsse highlighted that he and Ross sit in the bullpen with the rest of the Waterfall team, straying from the stereotypical owner and employee stigma. In doing so, the duo continues to approve “unilaterally every trade” as it did when it was first established.
“We tend to be the deal oriented guys in the weeds that look at every trade and approve every ticket,” he said.
Over its steady progression and maturity, the firm has distanced itself from the hedge fund arena, firm CFO Brian Breakstone said. Breakstone first joined WAM back in April 2008 after serving as a VP in the capital markets CFO group at Lehman Brothers.
“We are not [simply] a hedge fund anymore, we are an asset management company that has a few hedge funds as well as a separate managed account business and private equity [opportunities],” Breakstone stated last month.
Through this track record of product offering, and its distancing from a specific hedge fund designation, Waterfall has been able to attract some substantial mandates from the pension and retirement plans. These institutional commitments, according to the firm executives, have normally come in the form of separate accounts and range up to $100 million.
In their eyes, the recent pension shift from equities to fixed-income or alternatives allows Waterfall to fit both trends, Capasse mandated. Its high yield ABS strategy usually gets thrown into an opportunity bucket within fixed-income or a core plus strategy. Also, its non-performing loan strategy can be designated into the alternative class.
“The thing in that context that separates Waterfall is that we tend to be viewed as the non-mortgage, non-traditional ABS managers,” Capasse said. “We just view mortgages as nother asset class among the 60, and we tend to find currently better relative value in more orphan sectors of the ABS market.”
Capasse further explained within WAM’s 17th floor conference room that the firm sees “measured growth” within these strategies, where half-to-two-thirds of potential institutional investors could possibly commit to managed accounts so that they can “demand greater transparency and customizations.”

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