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June 24, 2020  

EJF Adds to Wave of Opportunistic Funds

EJF Capital, which saw substantial losses amid the coronavirus-related selloff in March, is raising capital for a fund that seeks to take advantage of fresh opportunities it sees in the unsettled financial market.

The vehicle, EJF Tactical Opportunities Fund, launched in April with a fundraising goal of $500 million. It has so far attracted some $50 million. The fund, which was up 6% through mid-June, invests in both debt products and equities, mainly in the financial-services sector.

The move marks yet another example of firms looking to profit from price dislocations and other disruptions that have emerged since the pandemic took hold. In some cases, those firms are asking investors to contribute despite poor performance during the turmoil.

Mill Hill Capital, for instance, lost 17% in its flagship Mill Hill Credit Opportunities Master Fund in March, leaving the vehicle down 7% since its inception in 2016. The firm subsequently began talking to investors about raising hundreds of millions of dollars for a fund that would make bond investments eligible for financing under the Federal Reserve’s Term Asset-Backed Securities Loan Facility.

Likewise, $12 billion Hildene Capital, which restructured two of its funds following significant losses in March, followed that with a capital-raising effort for at least two new debt funds, each with an equity goal of $300 million.

Other firms that began raising cash for new vehicles — or that have prepared to do so — include 400 Capital, BlackRock, Blackstone, KKR and Medalist Partners. Those vehicles specifically would invest in discounted mortgage bonds. Bain Capital Credit, meanwhile, plans to invest in a range of high-yield debt products via its Bain Capital Total Return Credit, which aims to launch in the third quarter.

For its part, the EJF fund focuses on areas where the firm believes securities are undervalued:

Structured products, including mortgage-backed securities.

Corporate debt, with a focus on banks, construction companies, insurance companies, real estate investment trusts and specialty finance businesses.

Stocks of financial-services companies that don’t face large short-term debt payments and that can insulate themselves from market volatility.

In some cases, EJF takes an activist approach, encouraging executives to take steps that will increase their companies’ market values.

The fund has sliding management and performance fees depending on when and how much money investors commit. For instance, an investment of $100 million to $200 million this year will cost investors 1% of assets and 15% of profits. The same-size investment in 2021 would come with a 1.25% management fee and a 20% performance fee. Investors pitching in less than $25 million this year will pay 1.5% and 15%, while a commitment of that size after this year would be charged 1.75% and 20%.

In all cases, capital will be locked up until Jan. 1, 2022. Those who invest after this year will have a 12-month lockup.

EJF, which is broadly focused on taking advantage of regulatory event-driven investing in the financial sector, suffered major losses in at least two of its funds this year. A long/short equity vehicle, EJF Financial Services Fund, was down 24.4% year-to-date through May, bringing its annualized return down to 5%. Separately, the firm suspended redemptions from its EJF Debt Opportunities Fund in March, citing the need to avoid selling assets in a dysfunctional debt market. That move raised eyebrows because just 6% of the fund’s investors had asked for their money back at that point.

EJF Debt Opportunities, which was managing $2.5 billion at the end of February, lost an estimated 15% in March. It’s unclear when redemption orders will be honored. Skybridge Capital, for one, was paring its investment in EJF by selling shares on the secondary market, part of a broader effort by Skybridge to reduce a huge exposure to structured products in its largest fund of funds.

EJF has a long history of profiting from market disruptions. The firm launched EJF Debt Opportunities in 2008 in response to the turmoil created by the financial crisis. Since then, EJF has continued to view various regulatory changes as opportunities, including the enactment of the Dodd-Frank Act and the 2018 tax cuts signed into law by President Trump.

EJF, based in Arlington, Va., is led by founders Emanuel Friedman and Neal Wilson, who share chief executive duties. The firm managed $6.3 billion on March 31, down from more than $7 billion at yearend. Kudu Investment bought a minority stake in EJF last year.