Local bank analyst Jeff Davis has left FTN Midwest Securities to help launch a private-equity fund that will invest in securitized bonds issued by community banks.
Davis has teamed up with Jim Wingett, the former managing director of FTN Financial Capital Markets in Memphis, as well as Dave Howe and Doug Duncan of that office. They plan to soon start raising money – primarily from hedge funds and family offices – and hope to have Wolf River Capital up and running in December.
Citing disclosure regulations, Davis wouldn’t divulge how much the group is looking to raise, but said “it should be a sizable, meaningful fund for this space.”
Wolf River will invest in pooled trust preferred securities, which are structured like collateralized debt obligations and contain various tranches of securities from dozens of financial institutions.
FTN, along with Keefe Bruyette & Woods out of New York, pioneered the instruments about a decade ago, managing the issuance of much of what now makes a more than $50 billion market.
Davis said some of the AAA-rated parts of those securities are now changing hands at about 50 cents on the dollar while some lower-rated mezzanine tranches are trading at 10 cents. Wolf River will buy up that debt, which should rise in value as banks and the broader economy rebound.
“This is a way to pay an eventual rebound in this sector,” Davis said. “We don’t think we have to pick the bottom.”
Davis, an eight-year veteran of FTN who joined the firm after the 2000 sale of J.C. Bradford, acknowledged the market-timing element to Wolf River’s formation. Broadly speaking, he said, a third of U.S. banks are in fine shape, another third have “some question marks” and the final third will either arrange a merger – voluntarily or out of necessity – or be taken over by government regulators.
“One of the keys is knowing the underlying companies,” he said. “This will be a very challenging two years for the economy.”