Startup Targets Fannie, Freddie Privatization
Mountaineer Partners is raising capital for a fund that would pay off handsomely if Fannie Mae and Freddie Mac are released from government conservatorship next year.
The New York firm hopes to assemble $100 million to invest in the shares of the two big mortgage agencies. It believes the vehicle, Mountaineer Partners GSE Opportunity Fund, could produce a return of 50-100% over the next 12-18 months. Its “bear case” projected return is a 50% loss, while its “bull case” projection forecasts a gain of as much as 200%.
Mountaineer is looking at much, if not all, of the gain to come from the agencies’ junior preferred shares, which were trading near four-year lows, according to a presentation sent out last month by the fund’s placement agent, Hawthorne Lane Capital. The fund is similar to one launched in 2018 by Muirfield Capital. That vehicle also bet that Fannie and Freddie would exit government control, and it was likewise focusing on junior preferred shares. As of January 2019, it was running $100 million.
Mountaineer contends the political and legal environment give the government the best shot it has had in years to divest from the government-sponsored enterprises. The firm believes the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie, has the power to end its control of them under a consent decree. Mountaineer sees that move as increasingly likely given the FHFA’s leader, Mark Calabria, has strongly advocated removing Fannie and Freddie from conservatorship.
“We believe the Trump Administration has the ability to act unilaterally without Congress,” Mountaineer wrote.
The plan to recapitalize the agencies has been delayed several times, and many mortgage-finance professionals including bond issuers, underwriters and due-diligence specialists say the coronavirus-related upheaval in the mortgage market could push things back further. They largely are resigned to the idea that the government has reordered its priorities to emphasize the continuing stability of Fannie and Freddie at the expense of releasing them from conservatorship as swiftly as possible.
Mountaineer was launched by portfolio manager Mark Lee in 2012. The opportunistic value and event-driven firm was running $133 million on March 31 via a hedge fund, Mountaineer Partners, a single separate account and as a sub-advisor for a multi-manager mutual fund, SEI Multi-Strategy Alternative Fund.
The hedge fund was down 11.9% in the first quarter by virtue of a 10.4% loss in March. But it has an annualized return of 5.2% since it launched in January 2012. Lee previously worked at Contrarian Capital, where he ran Contrarian Long Short Fund, which he launched in 2003. That fund had an annualized return of 11.1% through January 2011, at which point Lee left the firm. Lee also took over management of Contrarian Distressed Equity Fund in 2008. He earlier worked at Blavin & Co.
Supporting Lee on investment decisions is assistant portfolio manager John Hallowell, who worked with Lee at Contrarian and joined him for Mountaineer’s launch. Analyst Gregory Williams, previously of Symphony Asset Management, also has been with Mountaineer since its launch.