FINalternativesFRIDAY, JANUARY 19, 2007 www.ﬁnalternatives.com a publication of Stone Street Media VOL. III, ISSUE NO. 3IN DEPTH: ASSET-BACKED LENDING AND HEDGE FUNDS Stillwater Sees Sizzling Deal Flow With Hot StrategiesBy Hung Tran water is competing with traditional lenders on deals. Banks often referI f having a diversified portfolio and product line are the ingre-dients for a successful hedge fund, business to the firm, knowing it can close more quickly and bridge the loan until they can finish their duethen New York-based Stillwater diligence, according to Kanterman,Capital Partners is cooking. and six months later the firm is outStillwater sports an asset-backed of the picture. “Over 80% of thelending hedge fund, an asset-backed time we’re getting taken out by tra-fund of funds, and a multi-strategy ditional financing,” he says.fund of funds. All three vehicles Other sources of deal flow forposted double-digit returns last the fund include leads from lendingyear, 11.10%, 11.81% and 15.02% trade publications, mortgage bro-respectively (net of fees), with low kers and Stillwater’s own in-housevolatility. The firm also manages a underwriters. The firm closes onprivate equity real estate fund. about four deals each month from Managing director Jonathan Stillwater’s Jonathan Kanterman the roughly 100 that appears on itsKanterman attributes the funds’ radar, Kanterman says.steady returns to low correlation estate developer wants to borrow To mitigate property risk, Kan-to the equity and/or fixed income money for a property that Still- terman adds that the firm ensuresmarkets. “A lot of hedge funds say water appraises for $10 million, the owner has title insurance alongthey’re uncorrelated to the market, then it would lend the developer no with “every other type of insur-but I think we’re one of the few more than $7 million. ance,” including for floods and hur-who truly are market-neutral, in The typical borrower is not sub- ricanes, depending on the region.the sense that we don’t invest in the prime, nor one with bad credit, Also, in valuing a property, the firmstock or bond markets,” he says. according to Kanterman, but a always gets two appraisals: one developer who finds himself in from an independent appraiser andBridging The Opportunities a time crunch, with perhaps only one from his underwriting team. The Stillwater Asset Backed two weeks to close on a property.Fund is a bridge-lending fund that “We’re faster than the bank and Chasing Lawyersmakes short-term bridge loans in will send two or three people out The fund also lends money to per-real estate, law firms and insur- on a Sunday to the property to start sonal injury law firms that are con-ance. The fund is fully collateral- the underwriting and the appraisal,” tingency fee-based and need a lineized, and will not kick in more than says Kanterman. of credit to keep operations running70% loan-to-value. So, if a real That is not to say that Still- in between settlements. Stillwater’sCopyright Notice: Copyright 2007 by Stone Street Media, LLC. All rights reserved. Photocopy permission is available solely through Stone Street Media, LLC, 262 Mott Street, Suite 102A, New York, NY10012. Copying, photocopying or duplicating this publication in any form other than as permitted by agreement with Stone Street Media, LLC is prohibited and may constitute copyright infringement subject toliability up to $100,000 per infringement. For photocopy permission, back issues and bulk distribution needs, please contact us at 212-966-0047 or e-mail info@ﬁnalternatives.com.
credit is secured by every case that mium payments for two years and backed lending is not a traditionalthe firm has, as well as personal at the end of two years he repays strategy in the sense that there isguaranties from the firm’s partners. the loan plus interest.” a prime broker, custodian and an “If the law firm is looking at $30 If the borrower does not pay administrator, Kanterman explains.million in gross settlements over back the loan at the end of two When underlying managers balk atthe next year, that represents about years, then Stillwater takes back giving Stillwater access to its loan$10 million in fees for the firm. the policy and, through its stra- book, the firm hires a third-partyWe’ll lend about $2 million in a tegic partners, sells the policy on asset verifier in the form of a lawline of credit. Historically, most the secondary market, recouping firm, accountant or auditor.firms don’t fully draw down on the its principle plus interest. The firm “There’s no pricing or future charges a 14% interest on the insur- value of anything; it’s just realized ance premium loans and an average interest on a monthly basis. Two"Were faster than of 16% interest in all three lending years ago, we realized we weren’tthe bank, and will categories. doing that for our own clients and sosend people out on we engaged our auditor to indepen- Hands-On Experience dently do that,” says Kanterman.a Sunday." Stillwater’s asset-backed fund of Jonathan Kanterman funds features the same low vola- Wanted: Creativity Stillwater Capital Partners tility, low correlation steady returns The New Finance Fund, which as its sister hedge fund. Seventy- currently invests in 40 managers, five percent of the underlying man- interviews several hundred man-credit line and usually utilize about agers in the fund of fund’s portfolio agers per year, according to Jack50% of it,” says Kanterman. are asset-backed lenders with the Doueck, co-founder and managing The possibility of fraud is reduced balance is in more liquid asset- principal, who is keen on a manag-because firms are only borrowing backed securities. The vehicle doesabout 20% of their next 12 month’s not invest in the firm’s hedge fundrevenue, according to Kanterman, because it was “cleaner and sim- "A lot of times,who is further comforted by the pler” for Stillwater not to invest we run across afact that firms run the risk of being in itself. “If our hedge fund wasn’tdisbarred or losing their license in doing well, at what point do you manager who isthe event of a fraud, a deterrent if fire yourself?” asks Kanterman. really smart, butever there was one. The advantage for Stillwater and In addition, the fund is engaged its investors in running a fund of greedy."in insurance premium financing, funds alongside a hedge fund with Jack Doueckwhere it lends capital to high net- a similar strategy is the quality Stillwater Capital Partnersworth individuals who are taking of due diligence on underlyingout life insurance policies. Kan- managers. er’s creative niche within the asset-terman says the firm utilizes three “There are certain questions backed lending space. “If theyestate planning law firms who that we can ask, such as, ‘Do you have some kind of specialty andare its source of deal flow in this have title insurance?’, ‘Can we see expertise then we’re interested,” hespace. your loan documents?’, ‘How do says. “They bring us the type of bor- you value the collateral?’, ‘Do you “When I went into the hedgerower we’re most comfortable have fire and flood insurance?’ All fund business 16 years ago, I thinkwith, which is a 78-year-old high of these things hit closer to home there was under $100 billion in thenet-worth individual. They may when you have been involved in it industry, today it is over $1.5 tril-already have $20 million in life and done it,” Kanterman says. lion. What that means is that unlessinsurance and be taking out an On the flip side, what Stillwater you’re very creative and smart,additional $5 million life insurance requires from its underlying man- you’re just never going to make thepolicy through a major carrier. We agers also translates into running a returns.”will lend that individual the pre- better in-house hedge fund. Asset- And what is Stillwater looking
for in terms of creativity? Well, not necessarily looking for a three- can be a violation of trust,” saysconsider that the fund of funds is year track record and will invest Kanterman. “Above and beyondcurrently invested in one Euro- early in the underlying manager the checks and balances and duepean manager who is lending if he or she has a good pedigree, diligence, you want to have trust inmoney on different types of col- experience and investment thesis. your managers.”lateral including airline equipment, However, the firm will not tolerate Adding another layer to anand another Brazilian shop, which asset gatherers disguised as port- already desirable cake, Stillwaterlends money to cattle ranchers on folio managers. this month launched an offshoreindividual heads of cattle. “A lot of times we run across a ABS fund of funds for its Euro- “Part of the loan is backed by manager who is really smart but pean clients who wanted a morethe Brazilian government and he he has structured his product in a traditional asset-backed product,gets paid by the slaughterhouse,” greedy fashion where it doesn’t complete with a prime broker and asays Doueck. “These were ex- leave a great taste in our mouths,” custodian. Half of the capital comesJPMorgan bankers with great says Doueck. “If they make a from institutions and family officespedigrees and they found a niche bridge loan, the fund gets an and the other half from high-netin the marketplace where they can interest coupon but then they also worth individuals, according tocharge 18-20%. They hedge out charge points for that loan. In an Doueck, who says the firm doesn’tcurrency risks and they’re taking ideal world, the points should go have many large institutional cli-cattle, which is a commodity with into the hedge fund and we should ents, such as pension funds, becauseinsurance and protection against all participate. Some managers of capacity constraints.disease, and which sounds like a take those points and put them into The firm currently managesfunny business, and have built a a separate deal-origination entity some $700 million in total assetfinance structure around it.” that they own.” under management for over 350 “We’ve also had managers that clients. “We’re looking to bring inUnwanted: Greed said they were hard closing at a more endowment and foundation Doueck says the fund of funds is certain level and didn’t, and that money this year,” Doueck adds. Reprinted with permission of Stone Street Media LLC