By Jody Shenn and Sree Vidya Bhaktavatsalam
March 22 (Bloomberg) -- Pacific Investment Management Co., manager of the world?s largest mutual fund, raised more than $1.5 billion for a private pool to buy assets from banks looking to strengthen their balance sheets, according to two people with knowledge of the fundraising.
The Pimco Bravo fund, short for Bank Recapitalization and Value Opportunities, will buy debt such as troubled commercial and residential mortgages, and may invest directly in banks through securities including warrants and convertible debt, said the people, who asked not to be named because the fund is private. Pimco is still accepting money and expects to raise $2 billion to $3 billion in total before a final close later this year, said an investor briefed on the plans.
Pimco, best known for its fixed-income mutual funds such as those run by Bill Gross, has raised at least $6.5 billion from institutional clients to buy troubled mortgages and bonds backed by real-estate loans since the global financial crisis began in late 2007. Financial institutions are selling assets after setting aside money for losses on the debt and international regulators last year agreed to tighter capital standards under the so-called Basel III guidelines.
?You?ve got community and regional banks out there that have been every quarter adding to their loss reserves,? said David Tobin, a principal at Mission Capital Advisors in New York, which advises banks on real-estate debt and helps clients sell loans.
Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, declined to comment.
Community Banks
The Bravo fund will target smaller lenders and community banks and will be run by a team of Pimco fund managers led by Dan Ivascyn, a portfolio manager in the mortgage and asset- backed securities group, and Scott Simon, head of the group, according to the investor. Pimco also hired professionals from real-estate investment firm JER Partners, the investor said.
Similar funds by Pimco include the Pimco Distressed Mortgage Fund II LP, started in early 2009, which has returned about 60 percent annually after fees, one of the people said. The Pimco Distressed Mortgage Fund LP, which opened in October 2007 before the crisis peaked and lost almost a third of its value the following year, produced annualized returns since inception exceeding 10 percent, the person said.
Hedge funds investing in distressed securitized debt such as bonds backed by mortgages returned 28.7 percent on average last year, compared with 15.9 percent for funds focused on distressed corporate debt, according to industry researcher HedgeFund.net.
Delinquent
McColl Partners LLC, an investment bank founded by former Bank of America Corp. Chief Executive Officer Hugh McColl, will help Pimco invest in bank capital, the investor said. Midland Loan Services Inc. and Trimont Real Estate Advisors, two firms that service commercial loans, will help manage delinquent loans, according to the investor.
Sales of bad mortgages have been limited because banks remain generally reluctant to sell at prices that would let buyers profit, according to Erik Rand, manager of mortgage finance at St. Louis-based Stifel Financial Corp.?s Stifel Nicolaus unit.
?It?s still very, very hard to find assets that are for sale at a level that a buyer could make money on,? Rand said in a telephone interview. ?We?ve heard of some funds winding down because they couldn?t find enough products.?
?Very Hard?
Bank of America, the biggest U.S. lender, is a ?very active seller? of commercial real estate as it seeks to limit losses on assets accumulated through acquisitions, Chief Risk Officer Bruce Thompson said at a March 8 investor presentation. Bank of America and State Street Corp., the third-largest custody bank, sold mortgage-backed holdings last year, citing changing capital rules.
The number of banks considered ?problem? institutions by the Federal Deposit Insurance Corp. rose to 884 last quarter, the highest since March 1993. Problem banks? assets fell to 379.2 billion, after peaking in the first quarter of 2010 at $431.2 billion.
Pimco?s Bravo fund may also buy new home loans, though that won?t be its focus, the people said.
Investment firms such as Redwood Trust Inc., the Mill Valley, California-based company that completed the only two private securitizations of new home loans since mid-2008, and BlackRock Inc., the world?s largest money manager, have also been seeking to buy new home loans.
Firms say they anticipate increased opportunities because of regulatory changes that may reduce the size of the mortgages that government-supported programs can handle, and force issuers of mortgage-backed bonds to retain some risk.
--Editors: Christian Baumgaertel, Larry Edelman.
To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net.
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