PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
Note 1—Organization
PNMAC Mortgage Opportunity Fund, LLC (the “Fund”) is a limited liability company organized under the laws of the state of Delaware. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, non-diversified management company. Shares of the Fund were issued solely in private placement transactions that did not involve any “public offering” within the meaning of Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”). Investments in the Fund may be made only by “accredited investors” within the meaning of Regulation D under the 1933 Act. The investment objective of the Fund is to achieve attractive total returns by capitalizing on dislocations in the mortgage market through opportunistic investments primarily in U.S. residential mortgages and related assets, instruments and entities.
The Fund is managed by PNMAC Capital Management, LLC (the “Investment Manager”). The Investment Manager is a registered investment adviser with the Securities and Exchange Commission (“SEC”).
The Fund invests substantially all of its assets in a limited partnership interest of PNMAC Mortgage Opportunity Fund, LP (the “Master Fund”), a limited partnership formed under the laws of the state of Delaware. The general partner of the Master Fund is PNMAC Opportunity Fund Associates, LLC (the “General Partner”), a Delaware limited liability company, which along with the Investment Manager, is a wholly owned subsidiary of Private National Mortgage Acceptance Company, LLC (“PNMAC”), all of which are affiliates of the Fund.
The Master Fund operates as a master fund in a master-feeder fund structure. The Master Fund acts as a central investment mechanism for the Fund and the General Partner. The General Partner has the exclusive right to conduct the operations of the Master Fund. The Fund held an 89% interest in the Master Fund at June 30, 2014. The Fund is the sole limited partner in the Master Fund.
The Master Fund has the same investment objective as the Fund and conducts its operations through investments in mortgage-backed securities (“MBS”) as well as investments in PNMAC Mortgage Co. Funding, LLC, PNMAC Mortgage Co. Funding II, LLC, PNMAC Mortgage Co (FI), LLC and PNMAC Mortgage Co., LLC (the companies are referred to collectively as the “Mortgage Investments”).
● | PNMAC Mortgage Co. Funding, LLC is a wholly owned limited liability company. PNMAC Mortgage Co. Funding, LLC acquires, holds and works out distressed U.S. residential mortgage loans, and owns MBS resulting from securitization of such mortgage loans. |
● | PNMAC Mortgage Co. Funding II, LLC is a wholly owned limited liability company. PNMAC Mortgage Co. Funding II, LLC acquires, holds and works out distressed U.S. residential mortgage loans, and owns MBS resulting from securitization of such mortgage loans. |
● | PNMAC Mortgage Co (FI), LLC is an investment company that was formed to pool investor capital and take an interest in the proceeds of FNBN I, LLC (“FNBN”). FNBN is a limited liability company formed to own a pool of residential mortgage loans in a transaction with the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC owns a substantial participation interest in the proceeds of the mortgage loans held by FNBN that depends on the amount of proceeds collected; the remaining share is owned by PNMAC Mortgage Co (FI), LLC. At June 30, 2014, the Master Fund owned 68% of PNMAC Mortgage Co (FI), LLC. |
● | PNMAC Mortgage Co., LLC is a wholly owned limited liability company. PNMAC Mortgage Co., LLC acquires, holds and works out distressed U.S. residential mortgage loans. |
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
As market conditions permit, PNMAC Mortgage Co., LLC may transfer the mortgage loans it owns to the Master Fund to be securitized for financing purposes or sale. The Master Fund may hold interests in pools of such securitized mortgages and invests directly in other mortgage-related investment securities.
The financial statements of the Master Fund are included elsewhere in this report and should be read with the Fund’s financial statements.
The Fund began operations on August 11, 2008 and will continue in existence through December 31, 2016, subject to three one-year extensions by the Investment Manager at its discretion, in accordance with the terms of the Limited Liability Company Agreement governing the Fund.
Note 2—Significant Accounting Policies
The Fund prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification (the “Codification”). Following are the significant accounting policies adopted by the Fund:
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results will likely differ from those estimates.
Fair Value
The Fund carries its investments at their fair values with changes in fair value recognized in current period results of operations. The Fund groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. The three levels are described below:
Level 1 – Quoted prices in active market for identical assets or liabilities.
Level 2 – Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Master Fund. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and others.
Level 3 – Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an asset at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Investment Manager’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.
While the Investment Manager believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or inputs to estimate the fair value of certain financial instruments would likely result in a different estimate of fair value at the reporting date. Those fair values may differ significantly from the fair values that would have been used had a readily
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
available market for such assets or liabilities existed, or had such assets or liabilities been liquidated, and those differences could be material to the financial statements.
Investment in Master Fund
The Fund receives a proportionate limited partnership interest in the Master Fund equal to its relative contribution of capital to the Master Fund. The net increase or decrease in net assets resulting from operations includes the Fund’s proportionate share of the Master Fund’s income and losses (including net investment income and net realized and unrealized gains and losses on investments) arising from its investment in the Master Fund as reported by the General Partner of the Master Fund.
The Fund carries its investment in the Master Fund based on the Master Fund’s fair value and recognizes its proportional share of changes in the Master Fund’s fair value in current period operations. The fair value estimates of investments held by the Master Fund are based on the expected proportionate share of the discounted cash flow projections of the assets and liabilities of the Master Fund’s investments, which in turn are substantially dependent on the Master Fund’s proportionate share of the discounted cash flow projections of its investments in the Mortgage Investments.
Because the value of the Mortgage Investments has been estimated by the Investment Manager in the absence of readily determinable fair values, the Master Fund categorizes these investments as “Level 3” fair value financial statement items.
PNMAC Mortgage Co (FI), LLC’s operating agreement with the FDIC governing its investment in FNBN limits PNMAC Mortgage Co (FI), LLC’s ability to transfer any of its rights or interests in FNBN. PNMAC Mortgage Co (FI), LLC may only transfer all or any part of its interest or rights if (i) the transferee is a qualified transferee and (ii) it first obtains prior written consent of the FDIC. The contract specifies that the consent shall not be unreasonably withheld, delayed or conditioned, if the transferee is a qualified transferee.
Short-term Investment
The short-term investment, the BlackRock Liquidity Funds: TempFund Instituted Shares is carried at fair value with changes in fair value recognized in current period income. Short-term investment, which represents an investment in an institutional liquidity (or money market) fund, is valued based on the value per share published by the manager of the money market fund on the valuation date. The Fund’s short-term investment is classified as a “Level 1” fair value financial statement item.
Dividend Income
The Fund records dividend income on the ex-dividend date or, using reasonable diligence, when known to the Fund.
Expenses
The Fund is charged for those expenses that are directly attributable to it, such as, but not limited to, administration and custody fees. Expenses that are not directly attributable to the Fund are generally allocated among the Fund and other entities managed by the Investment Manager in proportion to their assets. All general and administrative expenses are recognized on the accrual basis of accounting.
Income Taxes
The Fund is treated as a separate taxable entity for Federal income tax purposes. The Fund’s policy is to comply with the provisions of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute to shareholders all of its distributable net investment income and
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
net realized gain on investments. Accordingly, no provision for Federal income or excise tax is necessary.
Management’s assessment of the requirement to provide for income taxes also includes an assessment of the liability arising from uncertain income tax positions. Management has concluded that there is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions that will be taken on the tax returns for the fiscal year ended December 31, 2013. Management is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months. In developing its conclusion, management of the Fund has analyzed all tax years that are open for examination by the relevant income taxing authority. As of June 30, 2014, open Federal and state income tax years include the tax years ended December 31, 2010 through 2013 and December 31, 2009 through 2013, respectively. The Fund has no examinations in progress.
If applicable, the Fund will recognize interest accrued related to unrecognized tax benefits in “interest expense” and penalties in “other expenses” on the statement of operations.
Distributions to Shareholders
The Fund has outstanding Series A preferred shares. The preferred shares have an 8% cumulative dividend preference and a liquidation preference totaling $114,000. In the event of a liquidation of the Fund, the accumulated preferred dividends and the remaining face amount of the preferred shares will be distributed before any distributions are made to common shareholders.
Distributions to shareholders are recorded on the ex-dividend date. The character of distributions to shareholders made during the year may differ from their ultimate characterization for federal income tax purposes. The Fund will distribute substantially all of its net investment income and all of its capital gains to shareholders at least annually. The character of distributions made during the year from net investment income or capital gains might differ from the characterization for federal income tax purposes due to differences in the recognition of income and expense items for financial statement and tax purposes.
Indemnifications
Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund may enter into contracts that provide general indemnification to other parties. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred, and may not occur. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Note 3—Fair Value of Investments
Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis as of June 30, 2014:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
| Short-term investment | | $ | 164,578 | | | $ | - | | | $ | - | | | $ | 164,578 | |
| Investment in Master Fund | | | - | | | | - | | | | 313,579,155 | | | | 313,579,155 | |
| | | $ | 164,578 | | | $ | - | | | $ | 313,579,155 | | | $ | 313,743,733 | |
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
There were no transfers between fair value hierarchy levels during the period ended June 30, 2014.
Following is a roll forward of the Fund’s Investment in Master Fund for the period ended June 30, 2014:
| Balance at January 1, 2014 | | $ | 304,323,367 | |
| Purchases | | | - | |
| Distributions | | | (1,010,564 | ) |
Net investment income and unrealized gain, net of carried interest allocated from the Master Fund to General Partner | | | 10,266,352 | |
| Balance at June 30, 2014 | | $ | 313,579,155 | |
Most of the Fund’s assets are carried at fair value with changes in fair value recognized in current period operations. A substantial portion of those assets are “Level 3” financial statement items which require the use of significant unobservable inputs in the estimation of the assets’ values. Unobservable inputs reflect the Fund’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.
The Investment Manager has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to its Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Fund’s investment portfolios and maintenance of its valuation policies and procedures.
The FAV group reports to the Investment Manager’s valuation committee, which oversees and approves the valuations. The valuation committee includes the Investment Manager’s chief executive, financial, operating, credit, and asset/liability management officers.
The FAV group monitors the models used for valuation of the Fund’s “Level 3” financial statement items, including the models’ performance compared to actual results and reports those results to the valuation committee. The results developed in the FAV group’s monitoring activities are used to calibrate subsequent projections used for valuation.
The FAV group is responsible for reporting to the Investment Manager’s valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors affecting the valuation and any changes in model methods and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on fair value of each of the changes to the significant inputs to the models.
Investment in Master Fund
The Fund’s investment in the Master Fund is a “Level 3” financial statement item and the Fund’s estimate of the fair value of its investment in the Master Fund is based on the Fund’s expected proportionate share of the fair value of the assets and liabilities of the Master Fund’s investments, which in turn are substantially dependent of the Master Fund’s expected proportionate share of the fair value of its Mortgage Investments. Most of the Mortgage Investments’ assets are mortgage loans and real estate acquired in settlement of loans which are carried at fair value.
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
Note 4—Investment Transactions
During the six months ended June 30, 2014, the Fund did not purchase any limited partnership interests in the Master Fund. The Fund received distributions from the Master Fund in the amount of $1,010,564.
Note 5—Shareholder Services Fee, Administration Fees and Custodian Fees
The Fund has a shareholder services agreement with the Investment Manager. Under the terms of the agreement, the Fund paid the Investment Manager a fee equal to an annual rate of 0.5% on capital commitments until December 31, 2011 and thereafter a fee equal to an annual rate of 0.5% of the Fund’s net asset value so long as the fee does not exceed 0.5% of the aggregate capital contributions to the Fund. The shareholder services fee is paid quarterly. The shareholder services fee for the six months ended June 30, 2014 was $772,067.
The Fund has engaged U.S. Bancorp Fund Services, LLC, an indirect wholly-owned subsidiary of U.S. Bancorp, to serve as the Fund’s administrator, fund accountant, transfer agent, and dividend paying agent. The Fund pays the administrator a monthly fee computed at an annual rate of 0.02% of the first $1,000,000,000 of the Fund’s total monthly net assets, 0.015% on the next $1,000,000,000 of the Fund’s total monthly net assets and 0.01% on the balance of the Fund’s total monthly net assets subject to an annual minimum fee of $120,000. The administration fees for the six months ended June 30, 2014 were $70,970.
U.S. Bank, N.A. serves as the Fund’s custodian. The Master Fund pays the custodian a monthly fee computed at an annual rate of 0.01% on the Fund’s average daily market value subject to an annual minimum fee of $28,800 across all fund complexes. The custody fee expense incurred by the Master Fund for the six months ended June 30, 2014 was $17,525.
Note 6—Directors and Officers
The Fund and Master Fund share the same board of directors. The Master Fund’s board of directors has overall responsibility for monitoring and overseeing the investment program of the Master Fund and its management and operations. All directors’ fees and expenses are paid by the Master Fund. Independent directors receive an annual retainer of $64,800 and a fee per meeting of the board of directors or committees of $2,000, subject to a cap of $15,000 per year for all non-regularly-scheduled meetings. The audit committee chair receives an annual retainer of $10,000 in addition to the amounts above. Directors are reimbursed by the Master Fund for their travel expenses related to board meetings. The total director fees and expenses incurred at the Master Fund for the six months ended June 30, 2014 were $148,975, of which $67,455 was payable at period-end.
One of the directors is an officer of the advisor and the Master Fund and receives no compensation from the Master Fund for serving as a director.
Certain officers of the Master Fund are affiliated with the Investment Manager. Such officers receive no compensation from the Master Fund for serving in their respective roles.
Note 7—Common Shareholders
The Fund is authorized to issue an unlimited number of common shares. The common shares have no preferential, preemptive, conversion, appraisal, exchange or redemption rights and there are no sinking fund provisions applicable to the shares. The Fund issues common shares at the net asset value per share
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
as calculated within 48 hours before receipt of capital called. Shareholders are not able to withdraw from the Fund other than through distributions made upon a realization of the Fund’s investments.
Common shares of the Fund were offered in private placements pursuant to Section 4(2) of the U.S. Securities Act of 1933, as amended on August 11, 2008 (the “Initial Closing”). The Fund raised $393,283,020 in aggregate capital commitments. No additional closings were held after the Initial Closing to accept new or additional capital commitments.
Common shares are distributed among three separate series based on the timing of capital contributions, which has affected the underlying calculation of carried interest for each series.
The Fund did not make any distributions during the six months ended June 30, 2014.
Note 8—Preferred Shares
Series A preferred shares of the Fund were created by the board of directors on August 11, 2008. The Fund is authorized to issue up to 5,000 Series A preferred shares at $500 per share. As of June 30, 2014 the Fund has issued 228 Series A preferred shares. Series A preferred shares are entitled to receive cumulative dividends in an amount equal to 10% per year. During the six months ended June 30, 2014, there were no dividends paid to preferred shareholders; accrued but unpaid dividends of $11,400 remained at period-end.
Upon redemption by the Fund, Series A preferred shareholders are entitled to the liquidation preference which is $500 per Series A preferred share plus accumulated and unpaid dividends. Series A preferred shareholders are not entitled to vote on any matter except matters submitted to a vote of the common shares that also affect the Series A preferred shares. The Fund shall not issue or sell any preferred shares or pay any dividend or distribution to the common shares unless the preferred shares have an asset coverage of at least 200% immediately following the given action.
Note 9—Income Tax Information
When appropriate, income tax basis reclassifications between net asset accounts are made for such differences that are permanent in nature. The reclassifications have no effect on net assets or net asset value per share. Following are the reclassifications recorded by the Fund for the year indicated:
| | | | | Accumulated Undistributed | | Accumulated |
| Year | | Paid In Capital | | Net Investment Income | | Net Realized Loss |
| 2013 | | $(28,495,394) | | $63,740,230 | | $(35,244,836) |
The income tax basis reclassifications noted above primarily relate to Partnership adjustments and distribution reclassifications in 2013.
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
Following are the gross unrealized appreciation and depreciation of investments and distributable ordinary income and long-term capital gains for federal tax purposes for the year ended December 31, 2013:
| Cost of investments | | $ | 195,369,751 | |
| | | | | |
| Unrealized appreciation | | $ | 79,886,958 | |
| Unrealized depreciation | | | (94,568,510 | ) |
| Net unrealized depreciation | | $ | (14,681,552 | ) |
| | | | | |
| Undistributed ordinary income | | $ | - | |
| Undistributed long-term capital gains | | | - | |
| Total distributable earnings | | $ | - | |
| | | | | |
| Other accumulated losses | | $ | (518,336 | ) |
| | | | | |
| Total accumulated losses | | $ | (15,199,888 | ) |
| Distributions paid from: | | | |
| Capital | | $ | 28,495,394 | |
| Ordinary income | | | 13,107,295 | |
| Long-term capital gains | | | 17,408,711 | |
| Total distributions | | $ | 59,011,400 | |
Note 10—Transactions with Affiliates
PNMAC Mortgage Opportunity (Offshore) Fund, Ltd. owns 29% of the Fund’s common shares.
The Fund paid $137,740 to PNMAC for reimbursable expenses paid on the Fund’s behalf during the six months ended June 30, 2014.
PennyMac Loan Services, LLC (“PLS”) acts as the primary mortgage servicer for all mortgages owned by the Mortgage Investments held by the Master Fund. PLS is a wholly owned subsidiary of PNMAC. The servicing agreement between PLS and the Mortgage Investments generally provides for servicing fees of 50 to 100 basis points of unpaid principal balance per year, depending on the type and quality of the loans being serviced, plus other specified fees and charges. The servicing arrangement also requires that PLS will rebate to the Mortgage Investments an amount equal to 13% of the servicing fees charged to the Mortgage Investments to approximate overall “at cost” pricing with respect to loan servicing
PNMAC Mortgage Opportunity Fund, LLC
Notes to Financial Statements
As of and for the Six Months ended June 30, 2014
activities for such assets. Total servicing fees charged by PLS to the Mortgage Investments before such waiver amounted to $2,910,537 for the period ended June 30, 2014. PLS provided servicing rebates to the Mortgage Investments relating to such charges totaling $563,025 for the period ended June 30, 2014.
The Fund’s short-term investment, the BlackRock Liquidity Funds: TempFund Institutional Shares, is managed by BlackRock Institutional Management Corporation which a wholly owned subsidiary of Blackrock, Inc. BlackRock Inc. is an affiliate of the Fund.
Note 11—Risk Factors
Because of the limitation on rights of redemption and the fact that the shares will not be traded on any securities exchange or other market and will be subject to substantial restrictions on transfer, and because of the fact that the Investment Manager invests the Fund’s assets in illiquid assets, an investment in the Fund is highly illiquid and involves a substantial degree of risk.
Due to the nature of the “master/feeder” structure, the Fund is materially affected by the actions of the Master Fund and other investors. Investment risks such as market and credit risks of the Master Fund’s investments are discussed in the notes to the Master Fund’s financial statements included herein.
Note 12—Subsequent Events
The Investment Manager has evaluated all events or transactions through the date of issuance of these financial statements. During this period the Fund received a distribution from the Master Fund in the amount of $390,182 for the payment of shareholder servicing fees and an additional distribution from the Master Fund in the amount of $77,300,000 which was subsequently distributed to shareholders.
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PNMAC Mortgage Opportunity Fund, LLC
The Fund files its complete schedule of portfolio holdings for the first and third quarters of each fiscal year with the SEC on Form N-Q. The Fund’s Form N-Q is available without charge by visiting the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. You may obtain information on the operation of the Public Reference Room by calling (800) SEC-0330.
Proxy Voting
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities owned by the Fund and information regarding how the Fund voted proxies relating to the portfolio of securities are available to stockholders (i) without charge, upon request by calling the Fund collect at +1(818) 224-7442; and (ii) on the SEC’s website at www.sec.gov.
Board of Directors
The Fund’s Form N-2 includes additional information about the Fund’s directors and is available upon request without charge by calling the Fund collect at (818) 224-7442 or by visiting the SEC’s website at www.sec.gov.
Forward-Looking Statements
This report contains “forward-looking statements,” which are based on current management expectations. Actual future results, however, may prove to be different from expectations. You can identify forward-looking statements by words such as “may”, “will”, “believe”, “attempt”, “seem”, “think”, “ought”, “try” and other similar terms. The Fund’s past investment performance and returns are not predictive of its future investment performance and returns. The Fund cannot promise future investment performance or returns. Management’s opinions are a reflection of its best judgment at the time this report is compiled, and it disclaims any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise.
Approval of Investment Management Agreement
On June 2, 2014, the Board of Directors of the Master Fund and the Fund (collectively, the “Funds”), including the “non-interested” Directors (the “Independent Directors”), met in person and voted to approve the continuance of the Investment Management Agreements (including the portions of the Master Fund’s partnership agreement referred to therein) with the Investment Manager for an additional year.
In considering whether to recommend approval of the Investment Management Agreements, the Independent Directors reviewed materials provided by the Investment Manager and counsel to the Independent Directors. The Independent Directors also met with senior personnel of the Investment Manager and discussed a number of topics affecting their determination, including the following:
(i) The nature, extent, and quality of services expected to be provided by the Investment Manager. The Independent Directors reviewed the services that the Investment Manager provided to the Funds since inception in August 2008 and are expected to continue to provide to the Funds. In addition, the Independent Directors considered the size, education, background, and experience of the Investment Manager’s staff, including the mortgage finance and capital markets experience of the Investment Manager’s senior management team. Lastly, the Independent Directors reviewed the Investment Manager’s ability to attract and retain quality and experienced personnel. The Independent Directors concluded that the scope of services provided since inception and expected to be provided by the Investment Manager to the Funds, and the experience and expertise of the personnel performing such services, was consistent with the nature, extent, and quality expected of an investment adviser of investment vehicles such as the Funds.
PNMAC Mortgage Opportunity Fund, LLC
(ii) The investment performance of the Funds and the Investment Manager. The Independent Directors received information about the performance of the Funds and the Investment Manager in managing the Fund. The Directors also received performance information regarding the Funds compared to certain indexes, benchmarks, and/or registered and non-registered funds managed by other investment advisers that had somewhat comparable investment programs.
(iii) Cost of the services to be provided and profits to be realized by the Investment Manager and its affiliates from the relationship with the Funds. The Independent Directors considered the estimated cost of the services provided by the Investment Manager. As part of their analysis, the Independent Directors gave substantial consideration to the compensation payable to the Investment Manager. The Independent Directors noted that the compensation terms would remain the same. In reviewing the management compensation, the Independent Directors considered the management fees and operating expense ratios of other registered and non-registered funds managed by other investment advisers that had somewhat comparable investment programs. The Independent Directors also reviewed and took into account other relationships between the Funds and the Investment Manager and its related persons, including the shareholder servicing agreement between the Investment Manager and the Fund, the mortgage servicing agreements between the Master Fund and an affiliate of the Investment Manager, and an agreement with BlackRock, which has an investment in the Investment Manager’s parent company, for a portfolio valuation analytic model. The Independent Directors also considered the compensation charged by the Investment Manager to its other clients. Finally, the Independent Directors took those other service agreements into account in the context of evaluating the profitability of the Investment Manager in respect of the overall relationship of the Investment Manager and its related persons to the Funds.
(iv) Economies of Scale. The Independent Directors also considered that possible economies of scale from future growth of the Funds were not relevant inasmuch as the Funds were closed to any new investment and had limited terms.
The Independent Directors had an opportunity to have Executive Session with counsel to the Independent Directors. During the course of their deliberations at the meeting on June 2, 2014, the Independent Directors thoroughly reviewed and evaluated the factors to be considered for approval of the Investment Management Agreements including, but not limited to: the expenses incurred in performance of services by the Investment Manager; the compensation to be received by the Investment Manager under the Investment Management Agreements; the fees charged by the Investment Manager’s peers; the past performance of the Investment Manager; and the range and quality of services provided by the Investment Manager.
The Independent Directors expressed satisfaction with the information provided at the meeting on June 2, 2014 and prior meetings, and acknowledged that they had received sufficient information to consider and approve the continuance of the Investment Management Agreements. No single factor was determinative to the decision of the Independent Directors. Rather, after weighing all of the reasons discussed above, the Independent Directors unanimously approved the continuance of the Investment Management Agreements.
The Independent Directors concluded that the compensation that the Investment Manager would receive under the Investment Management Agreements was reasonable.
