Ivan Zinn, founding partner and cio at Atalaya Capital Management, answers SCI's questions

Q: How and when did Atalaya become involved in the structured finance markets?
A: Atalaya Capital Management has been around for about eight years now. We started out in corporate credit, but over the last five years we have started to focus more on structured finance. We see greater opportunities in specialty finance and in some consumer assets, so it is a case of going to where those opportunities are.

Typically we are creating bespoke financing or buying into non-traditional structured finance asset classes. While we could invest in an ABS or an MBS bond, we prefer to look at what forms the underlying for those securities.

Q: What are your key areas of focus today?
A: Our business broadly breaks down into three categories. We have our assets strategy, which looks at structured finance and structured credit, and we also engage in direct lending - which is typically corporate or real estate lending. However, a large part of what we do is related to our opportunistic bucket.

That last category is broadly buying assets that are coming off financial institutions' balance sheets, such as loans. Those may or may not be performing, but we will typically take on the entirety of a bank's relationship to a given borrower rather than just a slice of a loan. These are often secured by real estate, but could be secured by consumer assets or something else.

Our structured finance activities are generally focused on areas such as new, novel products that perhaps do not have the size or track record to tap traditional financing sources. The shock to the system in 2008 created dislocation for the traditional funding sources for these asset classes and so we have been stepping into that gap.

Q: Which market constituent is your main client base?
A: The bulk of our investors are endowments and foundations, pension funds and also some high net-worth investors. Given our unique structure, our investor base reflects clients able to take on opportunistic mandates with an element of illiquidity.

Atalaya won an award earlier this year as the best hybrid hedge fund. This is a bit of a grey categorisation, since we see ourselves as a hybrid between a traditional quarterly liquidity hedge fund and more of a 10-year private equity draw-down structure.

The nature of what we do is shorter-term than a true private equity structure with a 10-year life, but we are not looking to provide quarterly liquidity either. That structure does not always appeal to the average hedge fund investor, but we have created a home in this opportunistic hybrid category, which seems to have resonated with the broader investment community.

Q: How do you differentiate yourself from your competitors?
A: The fact that we are set up differently to a lot of the guys out there is one big way we differentiate ourselves, but it is not the only way. That said, we do occupy a very interesting part of the market.

We also typically deal with companies at an earlier stage of their life-cycle than many of our competitors would look to. By getting in early, we are able to take advantage of opportunities before our competitors know they are there.

For example, several years ago we were financing a company with quite a unique business model targeting a niche consumer marketplace. It could not tap traditional capital and we were able to step in and get a rate of return on our investment with them that was more than 20%. Then later another fund came in and took us out at about a 10% return and a year after that they were tapping the securitisation market and able to refinance everyone at 5%. When things run smoothly, that is what is supposed to happen.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: Broadly we are seeing economic improvement and companies are tapping into financing sources that were not previously available. A perfect world for us would include a few bumps in the road to make sure capital is not flowing in too rapidly, but the current environment provides plenty of scope to invest.

At Atalaya, we are always looking for new transactions. It is like a constant treadmill, where we are trying to keep a little bit ahead of where we see the market going or where capital markets have not yet reached.

We have been a buyer of auto loans, but the opportunity there is probably less than it was in the last couple of years. There has been demand for subprime auto paper, but we are now seeing a handful of other asset classes offering better relative value. Those are generally in these more novel, newer financing asset classes.

One example would be merchant card advances. That is something which most of the structured credit investor universe might not have looked at yet because historically it has been very small, but it is growing and it will cross their desks over time. As technology allows asset classes like that to proliferate, it becomes even more important to identify opportunities early on. Our challenge is to run a little faster on the treadmill every day.

Q: What major developments do you need/expect from the market in the future?
A: As credit investors, we always think the glass is half empty. There have been so many head-fakes from the Fed, and the latest monetary policy tightening means we will see some volatility. If that gets extreme, then it is a concern, but we do like to have a degree of volatility.

It is going to be a bumpy ride for the rest of the year, but the machines that are out making structured finance products will roll on and continue to find buyers. The interest rate environment will encourage people to continue to take some risk as well, so while it may not be a spectacular end to the year, it should be a solid one.

JL