COPYRIGHT 2018 JACKSON CAPITAL MANAGEMENT, LLC. ALL RIGHTS RESERVED.

 

JACKSON OPPORTUNITY FUND III LP

JACKSON CAPITAL MANAGEMENT, LLC

Jackson Blvd. Equities, LP

Established 1993

OPEN

$7.8 Million

Jackson Opportunity Fund III LP

Established 2014

OPEN

$26.6 Million

Jackson Private Equity

$78 Million

Closed to New Investors

OPPORTUNITY FUNDS I & II

OPPORTUNITY FUND I

—2013 return of 20.43% 

—Annualized compound ROR of 12.83% since inception

—Yearly distributions have averaged 10.96%

OPPORTUNITY FUND II

2013 return of 14.78 %

Annualized compound ROR of 14.9% since inception

Yearly distributions have averaged 5.62%

 

FUND RECAP

2009 - 2018

ACCOUNT RECAP FROM INCEPTION to 2018

1/16/2009      Investment               $290,000

12/31/2018    Value                         $394,000

Appreciation since Inception        $104,000

Distributions                                   $263,000 (see right)

Total Gain                                        $367,000

                                                          126.58%

Distributions to Date

2009     $19,915

2010     $23,630

2011     $15,856

2012     $29,157

2013     $72,888

2014     $18,787

2015     $20,703

2016     $20,703

2017     $20,713

2018     $20,713

 

FUND HIGHLIGHTS

HIGHLIGHTS

 

Merger of Jackson Opportunity Fund I and Jackson Opportunity Fund II

Opened January 2, 2014

Liquid portfolios and transparent operations

Managed with established processes –

Research driven and strict risk controls

Has achieved consistent performance over life of Fund I (5 years) and Fund II (4 years); 2017 return of  21.35%; and 2018 return of 12.99% and over 1% in first quarter of 2019.

Investment Securities tied to Libor which has increased from 1.02 to as high as 2.81 in recent months

Yearly distributions are currently 6.00% per year

 

OPPORTUNITY

To invest in bonds secured by pools of Collateralized Debt Obligations or CDOs.

 

—Specifically, the Fund will typically purchase bonds secured by bank trust preferred securities and similar trust preferred securities issued by Real Estate Investment Trusts (REITS) and Insurance Companies.  Jackson will not be buying bonds secured by mortgage back securities.

 

—This fund is a merger of Jackson Opportunity, LLC and Jackson Opportunity Fund II, LLC

 
 

Why Bonds? 

Why Now?

LIBOR Rates had been flat for years. As Europe healed, rates went higher over time. Throughout the past years, we have seen no increase in LIBOR rates until December 2015.  Since December of 2015, the Federal Reserve (Fed) has raised rates a quarter of a point 9 times.  Three month LIBOR has risen from 0.23 to 2.39 since 2014.

Deferral/default rates have slowed considerably and recoveries have accelerated. Although there is some risk in Oil areas like Texas, the banking system is better capitalized than at the bottom in late 2008.
 

Our funds have been less volatile than the broad market with very small drawdowns.


We are distributing 6.0°/o per year.
 

We are still able to buy performing floating rate securities at 70 cents or lower leaving room for significant capital appreciation.

 

BACKGROUND

BACKGROUND

—MORTGAGE BACKED POOLS

The US housing market went through a period of explosive growth during the period of 2000 to 2007. A large portion of the growth was due to the creation of securitized mortgage products. Mortgages were issued, bundled together and sold off in the securitized Collateralized Debt Obligations or CDO pools. These pools issued bonds, collected the mortgage payments and made payments to the bond holders under the CDO rules. These secured bonds were rated by Moody’s, S & P, Fitch and other rating agencies.

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—Mortgage securitizations were instrumental in the explosive growth in housing. Borrowers who previously were not able to secure a mortgage and own their own home became willing participants in home ownership. The bonds were sold in CDO pools and the underwriter passed the risk on to the bond holders. Credit standards were loosened and mortgage bond investors were told that their risk was minimized because they were buying bonds based on a diversified pool of loans.

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—Due to the lax underwriting standards used to qualify these mortgagors, the CDO pools quickly became an area of concern. Bonds backed by these mortgages started defaulting and the lower rated tranches of bonds stopped receiving payments. The problems caused by these defaults contributed to the stock market decline in 2008 and 2009 and the decrease in value of many financial stocks.

 

TRUST PREFERRED

MARKET

Trust Preferred Securities

 

—Banks, REITS, and Insurance Companies have access to the credit market through the issuance of Trust Preferred Securities.

 

—Trust preferred securities are held on the issuer's books as a subordinated debt instrument which is senior to all equity and preferred stock (including any investment by the government through Troubled Asset Relief Program (TARP).

—Usually trust preferred debt is structured  so that the issuer may call the debt on any payment date on or after the call date (typically five years after issuance), but the challenging market today makes refinancing difficult and expensive.

 

—These securities are not extremely liquid, but with the secure yields and seniority to TARP we consider these a solid investment and an attractive alternative to equities where applicable. Remember that the TARP preferred ranks below the official debt status of trust preferreds, which should not be ignored by investors.

 

Smaller banks could not access the publically traded trust preferred securities market. It was not an efficient way to raise capital. The individual needs of smaller institutions did not justify the cost of a public offering. In many cases the individual institution was not public. To serve this market, many brokers entered the market to loan money to these smaller institutions. The institutions issued trust preferred securities to back the loan and the securities were pooled together into CDOs.

—The Trust Preferred Securities CDO market (“Pooled Trust Preferred Securities”) is over 10 year’s old, and was viewed as a reliable and cost-effective means for small to mid-sized banks, REITS, and insurance companies to issue capital. Indeed, investor acceptance of the structures had grown over time, leading to a substantial tightening in both the issue spreads for bank issuers of the underlying capital securities and the new issue re-offer spreads for most of the rated CDO tranches. The first pooled trust preferred structure was issued in 2000 and the market has absorbed an estimated $80 billion of issuance in the subsequent 10+ years under a number of proprietary structures and names.

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—Pooled Trust Preferred Securities are CDO vehicles that hold capital securities issued by special purpose subsidiaries of bank holding companies, insurance companies and real estate investment trusts (REITs). The vast majority of the underlying instruments in most CDO pools are bank-issued trust preferred securities (TruPs) and insurance company-issued surplus notes, both of which are subordinated and are structured with features intended to comply with federal and state regulatory authority guidelines for inclusion in the regulatory capital base of the issuing entity. In addition, trust preferred securities are includable in rating agency capital calculations to varying degrees depending on the rating agency and the structure. Subordinated debt and senior debt securities have also been included in collateral pools to a modest extent.

Suppliers and Ratings of Trust Preferreds

 

—In conjunction with investment bankers, the nationally-recognized rating agencies developed underwriting criteria designed for pooled execution to diversify the credit risk of unrated TruPs issuers in collateral pools. The “pooling” of individual trust preferred issues, therefore, allowed smaller companies to access the TruPs market. The rating criteria that were developed mitigate risk by establishing limits on concentrations by individual issuers as well as limiting geographical concentration (within distinct regions in the United States, for example). Over 1300 discrete issuers have been included in the POOLS issued to date.

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—Many Investment Banks have created their own pools of TruPs secured CDOs. They include Keefe Bruyette &Woods/First Tennessee with their trade marked product, Sandler O’Neill Partners products, and Cohen and Company products.

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—The CDO pools would issue a series of bonds that were backed by the pool of TruPs and insurance company surplus notes. The bonds were designated AAA, AA, A, B, BB and the lowest rated bonds were deemed to be income notes. Investors could choose which class of bond they would invest in. Each successive class would have junior rights and earn a higher rate of interest. The majority of the bonds would earn interest based on a floating rate tied to libor plus additional basis points.

 

CDO STRUCTURE

—The structure typically consists of senior notes, mezzanine notes, and a supporting equity piece known as the Income Note.

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—Investors in the notes generally receive uncapped, floating rate coupons benchmarked to three month LIBOR.

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—Certain Senior AAA tranches carry a high fixed rate coupon

CDO POOLS

—Some CDO pools are actively managed. Collateral changes from time to time as some trust preferred debt may be redeemed. —

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—Certain issuances are static, as opposed to actively managed CDOs, with no collateral management occurring after origination. The collateral pool for a given issuance is identified prior to deal pricing and not “ramped up” after funding of the transaction.

 
 

INVESTMENTS

—For insurance holding companies, these TruPs features are required to obtain favorable capital treatment from the rating agencies. Insurance holding companies have also issued senior or subordinated debt, and mutual insurance companies that lack a holding company have issued surplus notes, generally with maturity and call features similar to TruPs.

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For REITs, issuances have generally been TruPs or subordinated debt, although unlike banks and insurance companies, these instruments do not have a deferral feature and any missed payment constitutes a default. As issuers, REITs are generally interested in the capital-like nature of the instrument, including the 30-year final maturity. REIT growth has historically been constrained by the requirement in the tax code to distribute at least 90% of taxable income to shareholders to retain the REIT status. As a result, TruPs provide a welcome alternative source of capital for REITs that typically fund growth through equity capital offerings, diluting the existing ownership structure.

—Many of the trust preferred CDO secured bonds that The Fund would look to purchase are blended or “hybrid” deals in that they are backed by multiple asset classes, including collateral issued by Banks, Insurance Companies, REITs, Specialty Finance or Home Builders.

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—The asset classes supporting issuance have been confined to issues of banks, insurance companies and REITs. The majority of the underlying collateral in the CDO structures consists of TruPs. TruPs are typically issued at the bank holding company level by a special-purpose subsidiary of the holding company established solely for this purpose. TruPs residing in CDO structures generally have 30-year final maturities, with a 5-year par call feature, deferrable but cumulative coupons, and are junior subordinated obligations in the capital structure of the issuer. These features are largely a function of regulatory requirements for inclusion in Tier 1 capital for bank holding companies.

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STRUCTURE

STRUCTURE

—The Manager will receive an annual management fee of 1.25% (payable monthly) on committed capital and a 20% incentive fee paid annually.

 

—Incoming cash flow in the form of interest are normally distributed to investors.  We reserve the right to reinvest original principal returns.

 

—Jackson Opportunity Fund III is currently accepting capital.  We are able to have closing dates on a quarterly basis.  We anticipate a seven year life for the fund with the possibility of four, two year extensions. 

 

—We identified the opportunity in 2008. We started Jackson Opportunity Fund, LLC in December, 2008 and funded it in January 2009.  Jackson Opportunity Fund II opened in January of  2010.  The two funds merged as of January 1, 2014.

 

—For accounts of $10 million and above we will consider individually managed portfolios. 

STRUCTURE

STRATEGY

—We intend to invest in a diverse portfolio of CDO backed bonds secured by TruPs. By purchasing product from multiple issuers we end up with our risk spread across banks, insurance companies, REITs, as well as across many geographical areas and lending structures. We intend to buy A1, A2 rated bonds in a variety of pools.  We will look at paying Mezzanine B paper, but will invest only after strict underwriting of the deal.

 

—We feel that this is a space that continues to be under followed and in return undervalued.  We continue to take advantage of this opportunity.

 

—Prices rose in 2016 and 2017 and we have benefitted from this increase, generating  solid gains within our portfolio.  But we feel that prices continue to be undervalued and as libor continues to increase the effective yields we earn are extremely attractive.

 

—Our strategy is to be a steady purchaser of the CDO backed bonds, secured by TruPs not mortgages over a time frame deemed suitable by Jackson.  Incoming cash flow in the form of interest as well as incoming cash flow in the form of stock gains in distributed back to investors.  We do reserve the right to reinvest original principal returns.

 

RECENT HISTORY

—The market for mortgage backed CDO bonds collapsed in 2007. The Troubled Asset Relief Program or TARP was designed to be a solution to this problem. The Treasury then decided not to use TARP money to redeem mortgage backed CDO bonds from banks, insurance companies and other holders.

Prices have become firmer in recent years. 2012, 2013 and 2014 saw the number of issuers being cured increase significantly, while the number of deferral/defaults has slowed significantly, all positive signs for this space and for the broad market in general. Throughout the past years we have seen no increase in Libor rates, until December 2015. Since December of 2015, the Federal Reserve (Fed) has raised rates a quarter of a point 9 times.   These rate increases continue to push bond prices higher.  Rate increases look ready to pause here in June, 2019.