Asset Aggregations
Collateralized Debt Obligation
Joanne Marlowe-Noren
asset manager DOCUMENTATION

United FT believes in fostering new efficiencies in unexpected places. When birthing the Collateralized Variable Rate Demand Note (CVRDN) for use by mid-market businesses and projects that had a high and consistent demand for debt capital, the professionals at UFT began to refine their relationships in the asset management marketplace. Through the analytical process of positioning and cultivating high-quality Interim Asset Managers as Preferred Vendors for CVRDN related financial services, the need for a low-cost leverage alternative for direct use by professionals in the alternative investment, investment management, and hedge fund market began to demonstrate itself. Thus, the seed of what has grown into the Managed Variable Rate Demand Note (MVRDN) was planted firmly in the minds of the financial engineers at United FT. The MVRDN brings the investment or fund manager with a distinguishable investment strategy into an arena in which the “cost of credit” playing field is leveled and even slanted in its favor when it comes to accessing high volume debt to marry with equity or position as a stand-alone debt-based fund.


The barriers to entry to the alternative investment or hedge fund market are quite high. Although in recent years the number of hedge funds has blossomed and the alternative investment market has grown in terms of volume of investment by leaps and bounds, it takes an exceptional identifiable investment or fund management track record, a pedigree of exceptional performance and ability, and access to high volumes of dollars -- both in the form of equity and debt -- to penetrate the hard outer shell of this marketplace in any meaningful way as an investment manager. In large part, these initial barriers represent sufficient obstacles to bring only the best and brightest managers and funds into the spotlight, but once there, new hurdles step into the pathway leading to sustainable success.

For instance, with equity in hand, the establishment of leverage facilities or credit lines is critical to enhancing investment performance of available equity dollars. Because of the specialized nature of this market, the field of potential credit underwriters or banks capable of availing the volume of debt, credit or liquidity required for a manager to operate effectively is quite small and therefore competition is limited. As in any business in which the competitive field to source product – in this case debt – is small, pricing efficiencies are slow to manifest. The tendency is for the principal players to settle into a comfortable pricing model and compete for business within a market-defined revenue scale. Bearing this in mind, the difference between success and failure for skilled investment managers -- that as a rule work off of business models that call for very small profit margins calculated against high volumes of assets under management -- is often expressed in terms of mere basis points. Therefore, when comparing investment performance, a banner year and a mediocre showing can oftentimes come down to how well-positioned a fund or manager was in negotiating the pricing of its debt, credit, or leverage facilities or whether or not that fund manager gained sufficient access to credit or leverage to effectively implement its investment strategies. Understanding this, United FT set out to create a new financial instrument that would lighten the cost-of-credit burden upon the fund manager while simultaneously broadening the base of leverage or credit resources upon which a credit-worthy and qualified manager may potentially rely.


United FT has built a new debt instrument, designed to meet the specific debt finance and leverage needs of quality firms in the hedge fund and alternative investment marketplace. The MVRDN brings with it a turn-key issuance system starting with a standardized set of offering documentation that may be utilized under right of license and tethering that to a team of financial service providers as Preferred Vendors that understand not only how to implement the MVRDN, but how to meet the credit needs of the investment manager or fund as the Issuer of the Notes and Borrower.

In practice, the MVRDN is designed to sell in volume into the tier 1 institutional capital markets, satisfying the specific needs of money market investors for highly liquid investment grade instruments, and then adapting the risk-management mechanisms underlying the MVRDN in such a way as to permit those proceeds to compliantly operate within specific investment strategies that find a home in the alternative investment marketplace. By qualifying for purchase by the institutional money-market investor, the MVRDN brings with it a debt pricing model that is calculated just 15-20 basis points over the prevailing one-month LIBOR rate, making it an extremely cost effective debt instrument from the Issuer’s perspective while presenting an attractive rate of return to the subscriber.

The introduction of the MVRDN as a standardized instrument designed to allow investment managers and funds to raise their debt capital directly from the institutional capital markets will serve to deepen the capital well from which most managers must draw water, and, as a result, breed greater pricing efficiencies and healthier competition amongst qualified credit underwriters.


In short, the MVRDN enters the alternative investment marketplace bringing with it a new means of accessing very low-cost debt capital for use by the credit-worthy investment manager or hedge fund. A pre-qualified investment manager or fund, as an accredited licensee of United FT, can issue the MVRDN directly into the capital markets where it will be privately placed with a well-established body of institutional investors that are seeking instruments that exhibit the note characteristics manifest in the MVRDN. The MVRDN makes an exceptional surrogate for a conventional Collateralized Fund Obligation (CFO) or can be used as a creative means of permitting select credit underwriters to gain exposure to the performance of a particular investment portfolio or fund. In either instance, the MVRDN builds a bridge between short-term institutional capital sources and high volume credit consumers within the marketplace that previously had no direct bond of common business interest. Where new relationships are forged, opportunities for growth abound.

Read more about United FT’s MVRDN in our “MVRDN Documentation” section. If you have questions, comments or would like to investigate obtaining a license to issue the MVRDN, then just click “Contact Us Now” in the “Become a Licensee” section in the right-hand column to tell us about yourself and your needs. One of our service professionals will be pleased to contact you.

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