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EXCLUSIVE: PIMCO Raises $3.1B For Opportunity Fund And Is Buying Riskier Mortgages

PIMCO has raised more than $3B for a new opportunity fund and is already buying riskier mortgages and commercial real estate derivatives to hit its target returns.

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A filing from the Pennsylvania Public School Employees Retirement System said that as of September, PIMCO had raised $3.1B for its Bank Recapitalisation and Value Opportunities III fund.

An analysis by Bisnow of filings with the Securities and Exchange Commission from the start of September show that it has since then raised another $1B, taking its total to more than $4B. It has a hard fundraising cap of $5B.

PIMCO is the latest opportunistic investor to raise a big pot of cash for investment in spite of the feeling that real estate is late in the cycle. Investors like Blackstone, Goldman SachsMorgan StanleyApollo and Cerberus have also done major fund raises recently.

In a presentation outlining its strategy for the fund, PIMCO said it expected there to be a recession during the fund's life span, which will be a maximum of seven years, and as a result it was trying to buy resilient assets.

The presentation outlined the strategy, which will see it invest around 40% in residential assets, 40% in commercial, 10% on consumer assets and 10% in bank equity. It said it thought this would be split 50:50 between the U.S. and Europe.

It summed up its strategy as, “Do what banks can’t or won’t do.” 

It also outlined some of the investments the fund has made with capital raised during 2016 and early 2017, which includes investing in mortgages and derivative product that banks and other investors currently deem too risky.

It said it had bought $750M of U.S. “non-qualifying mortgages,” which are mortgages extended to borrowers with lower than average FICO scores, and had set up a forward purchase agreement to buy more.

There is a debate in the financial world as to whether non-qualifying mortgages are just subprime mortgages with a new name.

On the commercial side, PIMCO said it had bought commercial mortgage-backed securities and commercial real estate collateralized debt obligations, sometimes using these securities to take control of underlying real estate.

In Europe it has been a big buyer of Italian nonperforming loans and also invested in the London residential development sector.

The fund is targeting an internal rate of return of 14% to 16% and an equity multiple of 1.7 to 1.9x.