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Oct 2 2013 | 12:55pm ET
Chenavari Capital's existing "regulatory capital relief" fund earned 37% last year—and investors have rewarded it with pledges of US$200 million towards a new listed fund.
The London-based hedge fund plans to launch a London-listed vehicle to take advantage of what it expects to be more than US$6 billion in regulatory-capital deals next year. The Capital Solutions Fund will charge banks premiums to allow them to apportion losses against pools of assets to Chenavari. The banks will be on the hook for the first 1% of losses, with Chenavari absorbing the next 10%, allowing the banks to reduce their required capital reserve level.
Chenavari will target annual returns of 12% for the new fund.
"For many capital solution transactions involving a layering of risk or a risk transfer, the bank will seek prior approval from its regulator," Chenavari founder Loïc Fery told the Financial Times, seeking to head off criticism that such deals are similar to those that helped fuel the financial crisis. "It is better that risks stay in a 20-time levered, systematically-important banking institution, or is it better that the risks sit with a non-levered fund or investment vehicle?"
Chenavari's two-year-old European Regulatory Capital Fund has about US$1 billion in assets. "We wanted to raise more capital and diversifying our investor base in the listed space was one way to do it," Fery said.
"Chenavari funds have invested in a significant number of capital solutions in the past 18 months," he explained. "There has been huge balance sheet inflation for European banks—the deleveraging requirements are particularly large."