Jeroen Bakker, director at Cervus Capital Partners, answers SCI's questions

Q: How and when did Cervus Capital Partners become involved in the structured finance market?
A: Cervus Capital Partners launched on 1 July. I founded it along with two ex-IMC Asset Management colleagues - Felix Berger and Neil Tjin (see SCI 5 July).

We thought it would be best to continue our activities in a new franchise, having parted from IMC on good terms. The firm's focus is on consumer credit, with ABS and whole loan portfolios falling under this umbrella.

Q: What are your key areas of focus today?
A: There are two strands to the business: ABS asset management and a consumer credit advisory platform.

We've already closed one mandate for high net-worth individuals called the 'Distressed European ABS Mandate'. The fund is structured as a B.V. because they are more flexible vehicles and can allow new investors in.

The fund uses bottom-up analysis - based on base-case country risk, default and prepayment assumptions - to identify dislocations and find attractively-priced assets, with a target return in excess of 10%. We're focusing on European RMBS, SME CLOs, consumer ABS and ABS CDOs. The more structured and lower down the capital structure the assets are, the greater their illiquidity.

Given that the vehicle is cashflow-focused, the NAV isn't as relevant as with other funds in the sector and so we don't have to rely on valuations for the performance fee or exit fee. Adhering to NAVs isn't practical with respect to distressed ABS.

A substantial opportunity remains in distressed/mezz ABS, but the need to pick the right spots is greater now. The reason for illiquidity could be that the bond has been restructured or repackaged, or simply that the jurisdiction has fallen from grace, such as with Spain and Portugal. Risks remain for assets from these countries, but vintage portfolios in particular continue to be of interest.

The advisory platform is founded on the fact that the introduction of Basel 3 is driving banks to sell off certain assets and portfolios. At the same time, many investors are having trouble achieving the yields they're targeting. We're essentially seeking to match sellers with buyers.

This would typically involve looking at the cashflow of the asset/portfolio being off-loaded, coming up with an appropriate financing structure and then identifying a financier. Different portfolios can fit the specific appetite of different lenders, depending on the rating or return they're targeting.

The structures typically have two tranches, with the senior piece taken by banks or institutional investors, depending on the size of the portfolio. Within our network of investors, high net-worth money is interested in taking the first-loss piece.

It requires time and knowledge of lenders to be successful in this business, but we're seeing more banks opening up and increasing numbers of investors looking for these kinds of opportunities. These portfolios generally offer a stable stream of cashflow - even for the equity - because they comprise thousands of loans, with predictable patterns in terms of defaults and prepayment speeds.

The target portfolios are typically Dutch, German or Belgian mortgage or consumer loans and sometimes SMEs.

Q: What is your strategy going forward?
A: Over the next year or so, we may look to launch funds with lower return hurdles, focused on triple-A rated ABS. These funds would potentially target family offices, which typically invest in deposits or government bonds.

Triple-A rated ABS has a premium because of its complexity, but pays around 180bp over government bond yields. The funds will probably target both new issues and legacy paper to take advantage of the latter's higher returns and the former's higher coupon.

Equally, I wouldn't rule out branching out into other advisory work, given our knowledge and experience. One possible area could be real estate portfolios, but we'll focus on consumer credit advisory for the moment.

Q: What major development do you need/expect from the market in the future?
A: Liquidity is returning to the market and ABS spreads remain relatively stable compared to other risk markets. But spreads haven't yet tightened - and don't appear to be getting close - to a level where banks are incentivised to use securitisation as a powerful funding tool.

What isn't helpful at the moment is that securitisation is still perceived by many to be evil: it remains tainted by the subprime debacle. Regulators, in particular, need to differentiate subprime problems from the fundamental securitisation structure because the technology works.

This bias is exemplified by Solvency 2: whole loans and covered bonds receive much more favourable treatment than ABS. Consequently, the product is difficult for insurers to buy into. This is one of the reasons why we're not focusing solely on ABS.

It would be prudent for the authorities to recognise that only a small proportion of ABS was originated poorly and that securitisation structures have performed well in Europe, with the exception of some non-conforming deals. Securitisation remains a good way of targeting different levels of investor appetite and it would be negative for the economy if such technology was allowed to disappear.

CS