Structured-credit hedge fund LibreMax Capital is going back to school.
The New York-based firm, led by former Deutsche Bank star mortgage trader Greg Lippmann, plans to launch a new fund to tap into the $100 billion private student-loan space.
"We believe there is a significant investment opportunity in the private student-loan market," LibreMax wrote in a presentation to potential investors last month. "These distressed assets, which have lagged the RMBS recovery, remain fundamentally undervalued."
LibreMax is betting that the worst of student-loan defaults is behind us, noting that such defaults are correlated to unemployment, which hit a five-year low last month. "Our base-case scenario assumes that 60% of the total cumulative defaults have occurred, with 40% left to default in the future," the firm wrote. "As fundamentals continue to improve, lower defaults and severities should eventually be priced in (and ultimately realized) creating a finite horizon for this trade."
The LibreMax Private Student Loan Fund will have a three-year lockup that matches its three-year lifespan: The $2.8 billion firm will spend the first year investing the fund's money and the ensuing two years reaping the rewards, Bloomberg News reports. The fund, which targets annualized returns of 15%, will use "low to moderate" leverage to invest in floating-rate student-loan bonds, it said in the November presentation. The fund's investment universe is the roughly $10 billion in private loans issued between 2005 and 2007.
It is unclear how much LibreMax hopes to raise for the fund, but given the "finite horizon," it plans to stop accepting commitments in the first quarter.