Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 28)

Marathon Asset Management most ecologically friendly buildings in the world, with special insulated glass to maximize natural light and reduce energy use, as well as a system to capture and reuse rainwater. When the ﬁ rm moves into the 54-story building sometime around Labor Day, it will more than double its ofﬁce space, making it easier for its teams to work together to pounce on new opportunities. “Signing a ten-year lease is a big mental leap for us,” Richards confesses. “We were always very ﬁscally conservative. We chose the name Marathon because we felt we were in it for the long run. When we look at planning the company, we need physical plant to allow for growth.” Richards says it’s no coincidence that Marathon is moving into new ofﬁces at the same time that it is expanding its equity strategy. In January the ﬁrm changed the name of the Marathon Global Convertible Fund to Marathon Global Equities Fund. Jamie Raboy, a former Salomon Smith Barney fixed-income trader who has been working at Marathon since day one, will co-manage the fund with Hanover. Global Equities will invest in markets around the world, initially focusing on four strategies: convertible arbitrage, long-short trading, merger arbitrage and event-driven, and volatility trading. Under Hanover and Raboy, the Global Equities team will approach stock selection differently from the — BRYAN WHITE, way most hedge funds and investGLOBAL HEAD, BLACKROCK ments firms do. The equity analysts ALTERNATIVE ADVISORS will sit near Marathon’s debt analysts and share research. “It’s a unique platform,” Raboy says. “Fixed-income and equities don’t normally talk to each other.” For example, Raboy plans to identify investment opportunities the way the distressed group does, first screening for companies that are undervalued based on cash ﬂow. He and his team will compare the companies it isolates to others in their industries and determine whether there is a catalyst to unlock the value. Hanover and Richards are also trying to raise $1 billion for a separate private equity fund. Because the fund is in registration, no one at Marathon will discuss it. But having a dedicated private equity fund should enable the ﬁrm to invest more money in more deals than it currently does through the Special Opportunity Fund, where private equity is capped at 20 percent of assets. Marathon is building its war chest to take advantage of the massive fallout from the current credit crisis. Although the 0.9 percent default rate in December for global speculative-grade debt is still near the all-time low, according to Moody’s Investors Service, the rating agency expects it to jump to 5.3 percent by the end of 2008. In this environment, Ronzetti explains, banks will continue to keep tight reins on leveraged lending. As a result, Marathon’s private equity team is eyeing LBOs that are having difﬁculty securing funding. “We will be a source of ﬁnancing,” Ronzetti says. Marathon’s distressed-debt team maintains a watch list of companies. Through its analysis, the team has identiﬁed 150 that it believes will be forced into bankruptcy or require restructuring in 2008. They cut across several industries, including homebuilding, ﬁ nancials, building materials, retail and consumer cyclicals. Some of the most promising investments, says Richards, are in the market where the whole credit mess began — subprime mortgages. “For the mortgage market this is the biggest opportunity since the RTC,” he explains, referring to the Resolution Trust Corp., a federal government agency created in the late 1980s to unload at near-ﬁre-sale prices assets previously used as collateral for loans extended by the then-collapsing savings and loan industry. Although several Marathon funds are looking for ways to play the mortgage sector, the bulk of the ﬁrm’s investments will be made through its new subprime vehicle. Structured like a private equity fund — with a ﬁ xed life span — Marathon Distressed Subprime expects to have all its assets invested by the end of 2009 and has pledged to return all monies to investors by December 2014. Like some of Marathon’s other funds, Distressed Subprime charges a 2 percent management fee and a 20 percent performance fee, but the ﬁrm won’t take its incentive payment until after the fund is wound down and all the principal is returned to clients. Despite their rush to get the Distressed Subprime Fund set up quickly last summer, Hanover and Richards have been patiently waiting for asset prices to sink to even more depressed levels before deploying the capital. The new fund didn’t make its ﬁrst purchase until November, according to Wall Street sources, buying some asset-backed securities and CDOs being dumped by banks and other ﬁnancial institutions looking to clean up their balance sheets before year-end. The ﬁrm is rumored to be actively buying ABS and CDO subprime assets in addition to making its ﬁrst whole-loan investments, a package of $84 million of discounted subprime loans purchased in early January. When it came to evaluating the loans, Andrew Springer, a senior portfolio manager for the Marathon Structured Finance Fund, was able to turn for help to Phoenix-based Marix Servicing, a major servicer of residential mortgages that Marathon bought last year. “Having a servicing company enables us to buy distressed mortgage assets from banks and then play an active role in the workout of those loans,” says Springer. The Distressed Subprime Fund underscores the advantages of the Marathon model designed by Hanover and Richards over the past decade to shine during crises. “They are the provider of liquidity when there is a liquidity crisis,” says Morgan Creek’s Yusko. “It’s an ageold recipe for winning. Most great fortunes have been made by people who controlled liquidity.” “There were signiﬁcant early questions about their ability to work together and operate in a business.” 28 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2007/JANUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

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