Highland Capital Management, a Dallas-based investment firm with $19 billion under management, has, with the help of its bankers at Citigroup, cooked up a new take on specialty finance companies. It is preparing to place up to $400 million in non-public shares with a mix of hedge funds, mutual funds and high-net worth individuals to get its business started. It will file for an IPO within nine months.

"The goal here is to create a tax pass-through without having to use a REIT or BDC (business development company) structure," said Howard Adler, a partner at Gibson Dunn & Crutcher in Washington D.C., which is not involved. He adds there could still be some risk for investors because this is a first of a kind vehicle that may test the Internal Revenue Service's definitions of an untaxed entity.

Unlike MLPs and REITs, the partnership, controlled by a grantor trust, is not restricted to investing in commodities or real estate-related securities. And there is no requirement to invest in or lend to middle market companies as in a BDC. Highland is forming CDOs and focusing on the equity tranche, according to the offering documents. Investors are being wooed by the management team's track record: a 24% return over the past three years from investing in the riskier portions of collateralized debt obligations.

"We considered participating in the deal but turned it down. But we're rooting for it," said one executive, who said if this offering works, he would consider putting together a similar vehicle because there's buyside demand for the investment opportunity--both initially among hedge funds, and then post-IPO among retail investors--and there are management teams looking for permanent capital.

"This is part of the continued evolution of structured IPOs that offer total return income and growth," said a managing director familiar with the 144A offering, pointing to Apollo Investment Corp., a BDC and KKR Financial, a mortgage REIT, as prime examples of specialty finance companies that have gone public in the last year and a half.

But a complicating factor for the private placement came last Thursday, when Resource Capital Corp., a mortgage REIT that had also raised a round of 144A equity ahead of a public offering, postponed its IPO. The company hoped to go public at $15-17, but couldn't find buyers at the low end of the range. The pre-IPO shares were placed at $15 so anything below that would result in a loss for existing holders. And since buyers in Highland will want to know if they will be able to exit their illiquid investment with a profit, bankers saw the postponement as a potentially bad omen.

One sellside executive said uncertainty on interest rates ahead of Federal Reserve meeting and questions on future returns of mortgage REITs may have caused investors to hesitate, but expects the deal will come back soon. "This business comes down to the movement of the rate and credit cycle," added an analyst who expects mortgage REITs to continue to perform well. Capital markets executives at Credit Suisse and Friedman Billings Ramsey, the co-leads, wouldn't comment.

JPMorgan is acting as co-lead on the Highland offering.