It sounds like a novel idea: set up a mutual fund, load it up with residential loans bought at a discount in the secondary market, and sell shares to a yield-hungry public looking for a better return than the 0.50% that most money market accounts are paying. But can it work?
The Vertical Capital Income Fund hopes to find out.
But rest assured, the firm’s experiment in mortgage investments is brand new—and small. According to Bayard Closser, president of the
“We’re still raising money,” he said. Its goal is to tap wealth managers, and high-end net worth clients, and grow the fund to at least $1 billion, maybe $2 billion over the next five years. (For investors the minimum entry requires $1,000.)
Its strategy is simple: purchase performing residential loans at a steep discount from depositories and REITs, eventually reselling them for much more or waiting until the notes pay off. To date, the VCIF has paid roughly 65 cents on the dollar for its existing assets, Closser told me.
Banks are willing to sell loans at a discount because capital rules mandate that they hold money in reserve to cover potential losses on underwater mortgages, he said. But if they unload the paper at a loss, these banks receive cash right away and can redeploy the money into better performing investments.
Closser’s background is in the mutual fund industry, including long stints with ING and Fidelity. The firm’s mortgage expertise comes from Gus Altuzarra, who started his career as real estate broker (according to SEC documents) and morphed his way into mortgage banking, doing time at a hard money lender called Granite Mortgage, and then his own firm, Laguna Capital Mortgage Corp., which closed a few years ago.
Vertical services all the underlying loans itself and conducts its own due diligence. So far, it has experienced no delinquencies, but then again, its effort is young.
Although its goal of reaching upwards of $2 billion from just $11 million sounds aggressive, Closser said the company wants to avoid becoming a “suddenly hot mutual fund” that can no longer be managed because it has too many investors clamoring to get in. “If it gets to that point,” he said, “we’ll just close the fund to new investors.”
The entire Vertical Fund group of companies employs just 22 full-timers. “Right now we’re a unicorn,” he said.
