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The Structured Finance Doctor Is In

NewOak Capital CEO Ron D’Vari is betting his career on a risky call: that structured credit has hit bottom.

During the past few years, Ron D’Vari rode the roller coaster of structured finance. Armed with a Ph.D. in mechanical engineering, he rose through the ranks at State Street Research and Management Co. When the mutual fund firm was sold to BlackRock in 2004, he joined the New York–based money management colossus. Within three years, he had personally structured and marketed 15 collateralized debt obligations, and his 13-person team was responsible for $90 billion in assets, ranging from government-guaranteed Fannie Mae mortgages to triple-B commercial mortgage-backed securities.

Then structured finance imploded in the first half of 2007. D’Vari quickly shifted gears, building an advisory practice that handled one of BlackRock’s highest-profile assignments: helping the U.S. Federal Reserve Board value Bear Stearns Cos.’ troubled mortgage assets. BlackRock was rewarded for the work with a lucrative mandate to oversee Bear’s multibillion-dollar mortgage portfolio. But D’Vari wasn’t as lucky. With his team’s own structured assets down substantially, and in some cases worthless, D’Vari saw his valuable advisory mandates folded into BlackRock Solutions, the firm’s risk management unit, which wasn’t tainted by the losses. By August 2008, D’Vari had resigned.

Now the 50-year-old is trying to stage a comeback amid the ruins as co-founder and chief executive officer of NewOak Capital, a New York–based firm that advises investors on their holdings of troubled structured finance assets and manages such assets for clients. He launched the 43-person firm last year with partner James Frischling, who previously ran structured credit at Fortis Bank in New York.

“We are like the Betty Ford clinic,” says D’Vari, without a hint of irony that such a metaphor might suggest, given his role in packaging the products he is now helping investors detox from. “We have some of the best doctors in the world to solve multidimensional problems for medium to large banks, life insurers and monoline counterparties, and we charge case by case.”

D’Vari and Frischling see fixed-income markets beginning to bottom out and have accelerated plans to add asset management and broker-dealer franchises to their operation. The firm has already rented enough office space for a staff of 100 and built an extensive list of distressed-asset investment strategies for clients.

“One’s trajectory always needs to be adjusted to the road,” says D’Vari. “The road turns; you turn.”

NewOak began fundraising in May. Slated for a summer launch was a $200 million mortgage whole-loan investment strategy, which entails buying nonsecuritized mortgages opportunistically. The firm also anticipates strong returns from a $250 million commercial mortgage-backed securities strategy, which will mainly buy the first-priority classes that are — or were — triple-A rated. In addition, NewOak Capital plans to raise $500 million for a distressed-residential-mortgage-backed securities strategy and is developing a debtor-in-possession leveraged loan strategy.

NewOak Capital also intends to participate in the U.S. government’s Public-Private Investment Program, which enables investors to use the balance sheet of both the Treasury and the Federal Reserve to leverage their investments with no mark-to-market exposure.

Demonstrating its full-service approach the firm recently helped FCStone Group, a Nasdaq-listed commodities firm based in Kansas City, to unload one million energy futures contracts. NewOak Capital partner David Shimko brought in the business and advised the firm on the valuation of the contracts, which were held on both the New York Mercantile Exchange and the Atlanta-based IntercontinentalExchange, the over-the-counter futures exchange operator.

“NewOak gave us a complete solution, from analysis and advisory to management and execution,” says Paul (Pete) Anderson, CEO of FCStone, whose stock got a boost from the sale.

Competitors estimate that they would have charged at least $500,000, given the need to source the best price for an underwater position. D’Vari says that matching the buyer was “added value” and wasn’t structured into the fee.

“Working in Ron’s favor is that capital market advisory, a broad term, pays very well, so the team doesn’t need dozens of mandates for strong revenue to start the business,” says Viru Raparthi, co-head of advisory and structured credit at rival firm MARV-Southridge, an affiliate of Southridge Investment Group, a broker-dealer based in Ridgefield, Connecticut.

D’Vari didn’t intend to pursue a career in finance. He moved to the U.S. from Iran in 1975 to attend the University of California, Los Angeles. After finishing his graduate studies a decade later, he worked as an engineer at aerospace giant Boeing Co. in Long Beach, California, returning in 1993 to UCLA to earn an MBA. He was then hired by State Street Research in Boston, where he quickly rose to head of structured finance before joining BlackRock.

Former colleagues and peers describe him as a jovial ideas man with a touch of intellectual arrogance who has a penchant for using analogies. Unfortunately, his formidable intellect wasn’t enough to save him from the financial ravages that began in mid-2007. Corporate credit is down across the board. Mortgage issuance dropped to $1.3 trillion in 2008, a decrease of 33 percent from 2007. Asset-backed securities issuance fell 73 percent, to $137 billion, in 2008. And global CDO issuance nosedived from $481.6 billion in 2007 to just $56.1 billion in 2008, an 88.4 percent decline, according to the Securities Industry and Financial Markets Association.

Meanwhile, NewOak Capital’s competition continues to mount. Hedge fund Citadel Investment Group, fixed-income behemoth Pacific Investment Management Co. and European banks like BNP Paribas frequently use their balance sheets to win advisory assignments. D’Vari figures he can land on top by hiring hard-charging talent. “NewOak Capital is not a place to clip coupons and hang around for the dental plan,” he says.

Even so, advisory boutiques like NewOak face myriad challenges, not least maintaining the morale of partners accustomed to high-six- or seven-figure compensation. The young firm, by contrast, offers these veterans a minimal salary along with a slice of equity in the new enterprise.

The losses of the past few years have certainly been painful for investors in structured credit. But D’Vari believes that the great unwinding currently in progress will ultimately help structured finance markets rebound, albeit to a lower level and a less frenzied pace and than before the subprime mortgage contagion.

“I have made my own mistakes, but I tried to learn from them,” D’Vari allows in a moment of introspection. “The biggest lesson, and the hardest lesson, is to not be married to an idea.”

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