Finance News

D.E. Shaw Initiates $650M Diopter II For Financial Transactions

16 months after raising $650 million, D.E. Shaw establishes a second fund for synthetic securitizations. Diopter I.

TakeAway Points:

  • D.E. Shaw is raising its second fund, Diopter II, to invest in synthetic securitizations, following the $650 million raised for Diopter I.
  • Since 2016, the company has used data and computational analysis to invest $4.2 billion in more than 40 synthetic securitization transactions.
  • A robust middle-market lending pipeline and well chosen bank risk projects are highlighted by Apollo Global Management and Ares Management in the face of significant investor demand.

D.E. Shaw’s Synthetic Securitizations Investment

D.E. Shaw is raising its second fund in approximately 16 months to invest in synthetic securitizations, a rapidly growing asset class on Wall Street. The firm filed a private placement notice on Wednesday to raise capital for the D.E. Shaw Diopter Fund II. The notice did not specify the target amount for the fund, and a spokesperson for the New York-based firm declined to comment.

Diopter II will be managed by three co-portfolio managers: Rich McKinney, Marianna Fassinotti, and Steve Eilenberg, all of whom are managing directors in D.E. Shaw’s discretionary credit business. The first Diopter fund raised about $650 million in February 2023, capitalizing on banks’ synthetic risk transfers (SRTs). The issuance of SRTs and related instruments reached a record last year as banks navigated an evolving regulatory landscape.

Similar to its predecessor, Diopter II is expected to focus on investments that help banks optimize or reduce their capital requirements through risk transfers or sharing. These transactions allow banks to manage risk, obtain regulatory capital relief, and make more capital available for lending. D.E. Shaw has invested approximately $4.2 billion through more than 40 synthetic securitization deals since 2016, leveraging its data and algorithmic capabilities to analyze less-transparent loan portfolios.

Market views on Bank Risk Transactions

John Zito, Deputy Chief Investment Officer for Apollo Global Management Inc.’s credit arm, described insuring bank balance sheet risk as the “investment du jour” at the Bloomberg Invest conference in New York. However, he noted that Apollo has been selective in this area, favoring bank transactions that align with their long-term asset and origination goals. Zito cited Apollo’s acquisition of Credit Suisse’s structured products group as an example of their approach.

“It has to be really something that’s going to work for both parties,” Zito said. 

He also mentioned that many publicly announced bank credit partnerships have been “small, narrow and not, I don’t think, fully diligenced with respect to how difficult it is to run those partnerships if there’s not full alignment.”

Apollo had $671 billion of assets under management at the end of the first quarter, with credit comprising about $500 billion of the total.

Ares Management’s Pipeline for Lending

Mike Arougheti, CEO of Ares Management Corp., highlighted the growing pipeline for lending to middle-market buyouts, a key business area for the firm. Speaking at the Bloomberg Invest conference, Arougheti noted that private equity sponsors are increasingly looking for cash. “Investors are clamoring to get their money back,” he said.

Arougheti pointed out that there is about $1.5 trillion of private equity dry powder waiting to be deployed and $3.5 trillion already invested. Managers are currently deciding whether to allocate their available capital to existing companies or new opportunities. Despite concerns about private credit amid higher interest rates, Arougheti stated that Ares is not seeing any cracks in its private credit portfolio. The firm has close to 4,000 middle-market investments, and credit performance has remained strong.

“We feel pretty good about it,” Arougheti said, calling concerns about credit “a little bit overblown.” Maintaining the performance of its credit book is crucial for Ares as it aims to grow its assets under management to $750 billion by 2028, up from $428 billion at the end of the first quarter.

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