If fully subscribed, the trust will raise £250m (before expenses of £5m) during the offer period, which closes on 1 July, and plans to invest the proceeds in UK residential mortgage opportunities.
According to the firm’s prospectus, which was also released on Wednesday, the initial transactions are expected to be acquired in “large secondary market transactions from building societies, banks and other holders of mortgage portfolios.”
In a presentation ahead of the launch, Ben Hayward, lead manager of the trust and head of the Twentyfour’s asset backed securities team said it is currently reviewing four large portfolios “that historically would have been unlikely to have come to market”.
These portfolios, he said, have a clearly identifiable performance history for each mortgage, which means analysis, modelling and stress testing is “very similar to RMBS investing”.
This has not been done before, Hayward said, because the opportunity to do so wasn’t available until after the financial crisis.
In the years after the crisis, he explained, regulators began looking at how banks had got themselves into the situations in which they found themselves and began to crack down.
As a result of changing capital ratios, assets became more illiquid and more expensive for banks to hold, he said: “Increasingly defensive regulation around the banking community has resulted in asset disposals and capital raisings, which opens up opportunities. These are the types of investments we are looking to take advantage of in the fund.”
“Some other very low risk institutions , typically building societies that were only highly levered in low risk assets like residential mortgages, were caught up by regulations around leverage ratios too and have been forced to raise capital or dispose of assets,” he added.
According to Hayward these changes present a big opportunity, especially given how little competition there is in the space.
“UK residential mortgages approvals are running around 60,000 to 65,000 per month, prior to the credit crunch, the long run average was around 100,000, so there is a large gap that we are looking to get into.” As a result, the firm has a soft target to grow meets under management to £1bn within five years.
Initially, the firm is targeting a raise of £200m and then plans to use £800m rated debt funding to purchase £1bn of mortgages.
Twentyfour expects the trust to be significantly invested in portfolios of UK mortgages within a year.
In terms of returns, the trust expects to achieve a net spread after financing, losses and arrears of around 1.5-2%.
But, by using borrowings, is targeting a NAV total return of between 7 and 10% with leverage in the range of 4-7 times, depending on the quality of the portfolio. Twentyfour will charge a management fee of 0.75% of the lower of NAV or market cap.
