PPIP Funds Surge 36% in First Year, Treasury Says

Monday, 25 October 2010 08:09 AM

(Updates with professor’s comment in eighth paragraph.)

Oct. 22 (Bloomberg) -- A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year.

The eight funds created under the Public-Private Investment Program, or PPIP, reported net internal rates of return averaging 36 percent through Sept. 30, the Treasury Department said in a report this week. That compares with the 10 percent return for the Standard & Poor’s 500 Index and 8.2 percent for the BarCap U.S. Aggregate Total Return Index of bonds.

“The first year has been out of the ballpark,” Jeffrey S. Phlegar, who heads the PPIP fund run by New York-based money manager AllianceBernstein LP, said yesterday in a telephone interview.

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program. The government has gotten $215 million of interest, dividend and other payments, and the funds have more than $1.5 billion in unrealized gains. Under the wider Troubled Asset Relief Program, or TARP, the government has earned $25.2 billion on its investment of $309 billion in banks and insurers, an 8.2 percent return over two years, according to data compiled by Bloomberg.

“While the program is still in its early stages, we are certainly pleased with its performance for taxpayers thus far,” Treasury spokesman Mark Paustenbach said in an e-mailed statement.

GE’s 52% Gain

The PPIP fund managed by GE Capital Real Estate, a unit of Fairfield, Connecticut-based General Electric Co., and New York- based Angelo Gordon & Co., had the best return at 52 percent, the Treasury said. Oaktree Capital Management LLC, based in Los Angeles, had the lowest return at 19 percent.

The 36 percent average isn’t asset weighted and represents only the return on equity investments.

The government’s return on its contribution to PPIP is around 5.6 percent when including the debt financing it provided and considering only realized returns, said Linus Wilson, a finance professor at the University of Louisiana, in Lafayette. Officials shouldn’t have allowed the funds to make $159 million in equity distributions based on paper profits, he also said.

“This is irresponsible when taxpayers will be lending $14.7 billion of extremely low-interest loans” to the funds, Wilson said. “Dividends should not be paid until the private investors’ debt to taxpayers is paid in full.”

The eight fund managers raised $7.4 billion from private investors, which was matched by the Treasury. Government debt financing totaled $14.7 billion.

Invested Capital

The figures reflect returns only on about $18.6 billion of invested capital. The funds have yet to draw the remaining money.

“Returns are not a function of better fundamental data,” said Phlegar of AllianceBernstein. “It’s largely a function of compression in yield premiums,” he said, meaning buyers are willing to accept a lower return in the current bond market, bringing prices up.

Phlegar’s fund, which targeted 12 percent to 15 percent net returns, gained 41 percent.

Wilbur Ross, a PPIP fund manager and chairman of WL Ross & Co., a unit of Atlanta-based Invesco Ltd., said the funds have helped stabilize the market for mortgage-backed securities.

‘Boost’ for Traders

“The funds gave the trading community a boost in knowing there would be a buyer,” Ross, whose fund returned 34 percent, said in a phone interview.

James Hirschmann, chief executive officer of Western Asset Management, a Pasadena, California-based unit of Legg Mason Inc., said his firm’s 37 percent return was “higher than anyone was expecting.”

“It’s difficult to predict the markets, but we still think the valuations are compelling,” he said in a phone interview.

The funds are in the early stages of their three-year investment periods, and returns so far may be disproportionately affected by structuring and transaction costs and each manager’s pace of capital deployment, the Treasury said.

The Public-Private Investment Program was introduced by Treasury Secretary Timothy Geithner. It was aimed at helping ailing U.S. banks by buying devalued mortgage securities weighing down their balance sheets. Managers were selected in July 2009 and the funds began investing as early as that September.

The Treasury was criticized in an Oct. 7 report from a government watchdog for unnecessarily favoring the biggest money managers when it selected PPIP participants. Neil M. Barofsky, special inspector general for TARP, said officials may have hurt taxpayers by rejecting or deterring qualified, smaller managers.

--Editors: Josh Friedman, Christian Baumgaertel

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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(Updates with professor’s comment in eighth paragraph.) Oct. 22 (Bloomberg) -- A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year. The eight funds created under the...
Monday, 25 October 2010 08:09 AM
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