Maybe you could say that PPIP lost its pop. Or maybe it was justlate to the table. Maybe its inception was simply paved with goodintentions. May be. The fact is that the government's PublicPrivate Investment Program after a year of mystery, outrage andconjecture, and two quarters of activity, has utilized only about5% of its projected purchasing power. It seems that the proposedtoxic asset savior, when push came to shove, garnered little faithamong the commercial real estate community and in the processbecame a shell of its once Olympian ambitions. Dial back to March23, 2009 when the government announced PPIP. The market was fearfulof the potential for toxic assets to hamstring banks' balancesheets and strangle the loan market.

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The proposal, at its core, was a mix of government-subsidizedfree market ideology and private capital, calling for a select fewfund managers to facilitate price discovery through competitiveacquisition of troubled debt. The prognostication from the Capitolwas that the program would be able to raise $500 billion ofpurchasing power under the auspices of the public privatepartnerships and jump-start the skittish investment market.

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With an April 10, 2009 deadline, the Department of Treasuryinsisted the funds would be selected using narrow criteria:

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US headquartered, possessing $500 million of private capital and$10 billion of market value. The tight deadline to come up with thecapital and the high price of participating created more than a fewdetractors as it limited smaller investors from getting into thegame. However, a handful of minority- and women-owned firms weregiven entree into the program by teaming up with larger funds.

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The money that the government intended to match would also becoming out of the oft-maligned Troubled Asset Relief Program andonly a scant nine measured up to the Treasury criteria. Acombination of Angelo Gordon and GE, BlackRock Inc., Invesco Ltd.,Marathon Asset, Oaktree Capital, RLI Western, and WellingtonManagement were allowed to play in the Treasury's sandbox. BlackRock declined to comment. Invesco and Wellington had no comment,while the remaining participants and the US Treasury Department didnot respond to multiple inquiries for comment.

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After two quarters of activity, March 2010 ended with the PPIPfund managers raising $6.3 billion in private equity, bolstered bymatched funding from the government, for a total of$12.5 billion.The Treasury also brought $12.5 billion of debt.

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GE Capital, Angelo, Gordon Close $58 PPIP Fund

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Norwalk, CT-based GE Capital Real Estate and New York City-basedAngelo, Gordon & Co. recently closed on a $5-billion LegacySecurities Public-Private Investment Fund. The fund was launched inOctober 2009.

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With total commitments of nearly $1.25 billion from investorsand an additional $3.7 billion in matching capital and leveragefrom the US Treasury Department, the fund has approximately $5billion to invest in eligible RMBS and CMBS. GE Capital and Angelo,Gordon were selected last year as a fund manager to participate inthe Obama administration's Legacy Securities PublicPrivateInvestment Program.

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A spokesman for GE Capital tells DAI that SEC regulationsprohibit divulging specifics on the fund's investment plans to ageneral audience. He adds, however, that the fund will be gearedstrictly to purchasing legacy securities through the PPIP programrather than new issues.

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"Raising a fund of this size in the current economic environmentis a significant achievement, and in line with our strategy oflaunching an investment management business," said Ron Pressman,president and CEO of GE Capital, in a release. A broad crosssection of investors participated in the fund, including corporateand public pensions, endowments, high-net-worth individuals and asovereign wealth fund, the release states.

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In April, the Treasury said all eight funds in the PPIP programposted a profit in the first quarter of 2010. Compared to the thirdquarter of 2009, the PPIP fund managers' holdings had nearlytripled as of March 31, according to the Treasury report. capitalto the table, leaving the program with $25.1 billion of totalpurchasing power. By the end of Q 1 '09, the PPIP fund managershave drawn down roughly $10.5 billion of total capital invested.This was a far cry from the originally boasted $500 billion at thestart.

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"The government was surprised by the relative lack of interest,"says Robert Knakal, founder and chairman of Massey Knakal "A bigreason why you didn't see more people wanting to get involved wasthat the government was creating policy as they went along." Hepoints out that there was a lot of skepticism and a general lack offaith among investors who felt the Treasury might "change the rulesof the game" on a whim.

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Roughly 88% of the portfolio holdings are non-agency residentialmortgage backed securities and only 12%, or $1.2 billion, are CMBS.Of those, $309 million are super-senior debt, $393 million aretriple-A rated mezz loans, $346 million are triple-A junior and$141 million are other CMBS.

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The Angelo Gordon/GE fund has recorded the highest rate ofcumulative net performance, at 20.6%, which is almost double therunner-up, BlackRock. The Treasury's report, however, notes that"early performance may be disproportionately impacted bystructuring, transaction costs and the pace of capital deployment."There are at least two-and-a-half more years left for the PPIPfunds to invest, however, as the market returns and institutionalinvestors emerge from hibernation, the relevance of the program isbeing put into further question.

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"Clearly fundamentals look like they're getting better and itcould be that these investors will have competition from non- PPIPbuyers. Most of the activity in the PPIP investments have been inMBS, so from a commercial real estate point of view, you're talkingabout less than $1 billion of MBS activity that has occurred withinthe PPIP," Knakal relates.

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Noticeably absent from the first quarter report is TCW Capital,which found itself liquidated after violating one of the tenets ofPPIP's participation requirements. After a reported $358 millioninvestment, TCW-by letting go chief investment officer JefferyGundlach-broke a PPIP clause barring the replacement of executivesduring the program. As a result, TCW's government allocated fundswere redistributed to the remaining eight funds and the firm splitany proceeds from toxic asset sales with the government. TCW didnot return any inquiries from DAI.

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With a fraction of the investment capital available and alreadyone player disqualified, the good coming from PPIP is limited. "Theminute PPIP was announced-and this includes both TALF beingexpanded to include commercial real estate and PPIP-you saw creditspreads compress significantly just based on the sheer existence ofthese programs," Knakal explains. "So there was a tangible impactbased on the existence of these programs that has been much moreimpactful than the actual activity the programs havegenerated."

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Regardless of its intentions or value, PPIP, Knakal adds, tookso long to get into the mix that the party had already started towrap up by the time it showed up. "The conditions that existed atthe time these programs were contemplated and formulated ceased toexist a month or two after the programs were announced," he notes."It's not surprising that that amount of activity was wellbelowwhat was expected."


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