Consultant warns of PPIP risks

The Pension Consulting Alliance is warning clients to exercise caution in investing in the Public-Private Investment Program, advising that other opportunistic fixed income investments offer a better risk/return profile.

In a letter to clients, the US consulting firm said lack of investment liquidity was a key concern, with investors facing a long lock-up period of eight years while still being subject to potential capital calls.

In addition they were complex structured securities requiring high levels of scrutiny, contained leverage and some uncertainty associated with price discovery, and were in a highly volatile and illiquid market.

The consultant also warned there could be potential for high investment management fees and misalignment of interest.

Under the program the government will make $30 billion available in one-to-one financing available to the nine managers to buy troubled securities from financial institutions.

The selected managers have up to three months to raise at least $500 million from private investors, which PCA said was a tight deadline in which to evaluate PPIP investments.

PCA’s analysis of the underlying assets, which are legacy senior residential mortgage-backed securities and senior commercial mortgage-backed securities which have fallen dramatically in price during the economic downturn, shows they will continue to exhibit significant credit and default risks.

While there are some benefits to the PPIP mortgage securities program, including potentially large returns and no mark-to-market accounting, PCA also said manager selection issues were heightened.

Only a small number of funds managers have been selected, which greatly limits the breadth of manager selection usually exercised, PCA said.

The managers participating in the initial round of the program are:

• AllianceBernstein, LP and
  its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
• Angelo, Gordon & Co.,
  L.P. and GE Capital Real Estate;
• BlackRock, Inc.;
• Invesco Ltd.;
• Marathon Asset Management, L.P.;
• Oaktree Capital Management,
  L.P.;
• RLJ Western Asset
  Management, LP.;
• The TCW Group, Inc.; and
• Wellington Management
  Company, LLP.