David Moffitt, head of tactical investment opportunities at LibreMax Capital, answers SCI's questions

Q: How and when did LibreMax Capital become involved in the securitisation market?
A: LibreMax Capital was established in October 2010 by founding cio Greg Lippmann and founding president Fred Brettschneider, who previously worked at Deutsche Bank and Credit Suisse together. The firm - which focuses exclusively on structured credit - employs 38 people in New York and has an AUM of over US$2.6bn.

Our US$1.37bn flagship hedge fund invests across RMBS, CMBS, CLOs and consumer ABS, including marketplace loans. This strategy has quarterly liquidity.

We also manage a US$590m Value Fund - which has a three-year lock-up - a Fixed Income Alternative Monthly Core fund, a CLO equity opportunities fund and a couple of managed accounts.

Q: What are your key areas of focus today?
A: My sense is that asset management in credit is heading in two directions: towards liquid, lower duration investments or towards longer-duration capital, which tends to be a better holder of illiquid assets; each has a different return profile. My role at LibreMax falls squarely into originating assets in the second camp.

I have been tasked with sourcing tactical opportunities and special situation investments. The thesis is to raise vehicles to tap the more illiquid, bespoke assets that require longer-duration patient capital.

These vehicles are private equity-style funds, with a five-year initial term and the ability to stretch longer if needed. The opportunity set spans permutations on illiquidity, complexity, credit risk and the ability to structure asymmetries in outcome.

At present, we're focusing on private credit assets because there is a unique opportunity to raise and deploy long-dated capital to provide liquidity in situations where broker dealers have retreated. When volatility or distress returns, as they inevitably will, it will be the patient capital vehicles that will likely be the providers of liquidity.

The key is to identify partners who are seeking liquidity and structure transactions directly with them. As such, we prefer bilateral transactions - including capital relief trades - as differentiated origination is important to our investors.

Q: What are some key areas of consideration for you regarding regulatory capital trades?
A: Cheap assets are very difficult to find, so the alternative may be to embrace complexity or duration - or move down the credit curve to find yield.

In regulatory capital transactions, we tend to favour loan books and prefer portfolios to be core to the institution. If there's a default, we like to see that the origination banker is also at risk. This means that the entire institution is incentivised to do the right thing regarding the business and the transaction.

As part of our investment process, we diligence bank origination process and portfolio and recovery management teams, analyse historical default and recovery history of the bank and identify any outliers in terms of performance or portfolio composition. We prefer there to be a loss mitigation team behind the portfolio - thereby creating alignment of interest - and typically invest in the 0%-10% part of the capital structure.

Q: What major developments do you expect from the market in the future?
A: Risk transfer technology is broadening to accommodate higher ROE requirements, new business lines, risks and regions. However, aside from the global SIFIs, few US banks are involved in the credit risk transfer market. Super-regional banks in the US seem the most likely candidates to benefit from the technology, but there is some reticence to be the first mover.

US banks cleaned up the asset side of their balance sheets quickly post-crisis, so the need for credit risk transfer in Europe is greater. Similarly, banks were able to raise capital relatively cheaply in the US, whereas capital has been very dear in Europe. However, as US banks feel pressure to improve ratios and be more efficient allocators of capital, the pressure to embrace credit risk transfer is certainly increasing.

CS