Highland Capital Management has closed the first investment vehicle that could open collateralized debt obligation equity investing to a broad base of institutional and retail investors. The $250 million Highland Financial Trust is the first CDO equity fund that plans to go public, according to officials close to the deal. “We’ll be able to sell to a broad range of investors--mutual funds, individuals and income-oriented funds,” one said of the post-IPO expectations.
The trust will primarily invest in equity of cash CDOs created by the Dallas-based CDO manager. Nine months after close, the trust will file a registration statement with the Securities and Exchange Commission for an initial public offering sometime in the fourth quarter, the official said. Going public will give the vehicle much more liquidity than CDO equity. Creating the fund also gives Highland Capital permanent capital to fund equity positions of its securitizations. “Selling a CDO’s equity is a month to six weeks of roadshow, which takes the manager of the transaction away from his management role,” one official said. “This is a very attractive alternative.”
Highland Capital has three CDOs totaling $3.6 billion lined up for this structure: the $2.5 billion Tierra Alta CDO 2006-1, an asset-backed CDO; Rockwall CDO, a collateralized loan obligation; and HFT Real Estate CDO 2006-1, a commercial real estate CDO. During the first quarter, Highland Financial Trust expects to use about $110 million of the offering’s proceeds to buy all or a majority of the three CDOs’ equity.
Citigroup and J.P. Morgan co-led the deal. The 16.2 million shares were priced at $15 on Jan. 17; the deal closed on Jan. 24. A mix of hedge funds, mutual funds and high-net worth individuals bought the shares. The fund will likely be listed on the New York Stock Exchange when it goes public.
Danielle Romero-Apsilos, Citigroup spokeswoman, and Kevin Ciavarra
, Highland’s spokesman, both declined comment.