Dec. 10 (Bloomberg) -- Greg Lippmann, chief investment officer at $2.8 billion hedge-fund firm LibreMax Capital LLC, plans to start a fund that will invest in private student-loan debt.
The LibreMax Private Student Loan Fund LP will have a three-year lockup period and invest in floating-rate student- loan bonds, the New York-based firm said in a November presentation obtained by Bloomberg News. The fund will use “low to moderate” leverage and seek net annualized returns of 15 percent, according to the presentation, which did not specify how much the firm plans to raise for the fund.
“We believe there is a significant investment opportunity in the private student-loan market,” LibreMax wrote in the presentation. “These distressed assets, which have lagged the RMBS recovery, remain fundamentally undervalued,” the firm said, referring to residential mortgage-backed securities.
Lippmann, 44, a former Deutsche Bank AG trader who gained fame by betting against subprime-mortgage bonds before housing collapsed, left in 2010 to start LibreMax. He was joined by Fred Brettschneider, the German bank’s former head of global markets in the Americas; Eugene Xu, formerly Deutsche Bank’s head of asset-backed securities trading strategy; and Jordan Milman, the bank’s former head of subprime and non-agency trading and re- securitization.
Student-loan bonds should gain as U.S. employment improves, since defaults are historically correlated to the unemployment rate and other economic indicators, LibreMax wrote in the presentation. The jobless rate dropped to a five-year low of 7 percent in November as American employers added more workers than forecast.
Jonathan Gasthalter, a spokesman for LibreMax with Sard Verbinnen & Co., declined to comment on the fund plans.
The size of the student-loan market is about $1 trillion, 10 percent of which is private, LibreMax wrote in the presentation. The size of the fund’s investment universe is about $10 billion of student loans issued in 2005 to 2007. The firm will typically aim to buy debt whose borrowers are 65 months or more into repayment, according to the presentation. The firm estimates that the bonds yield 8 percent to 10 percent today.
“Our base case scenario assumes that 60 percent of the total cumulative defaults have occurred, with 40 percent left to default in the future,” LibreMax 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 fund will stop accepting client commitments in the first quarter of 2014 and have an investment timeline of one year. It will harvest investments over two years, according to the presentation.
--With assistance from Nathaniel Baker in New York. Editors: Sree Vidya Bhaktavatsalam, Josh Friedman