CLO manager M&A deal boosts equity investor Hildene Capital

Hugh Minch

Reporter

Hildene Capital Management boosted returns in its CLO equity business last month after its manager partner Carlson Capital sold the management contracts for its CLOs to WhiteStar Asset Management.

Hildene entered into a joint venture with Carlson and investment bank Jefferies in 2020, where Hildene and Jefferies would provide warehouse capital that would convert to equity capital across Carlson’s new CLOs.

The agreement allowed Hildene to share in the economics of a smaller manager, being granted fee rebates while the firm’s CLO business grew to scale.

“CLO platforms are a monetisable asset class in today’s market,” says Dushyant Mehra, co-chief investment officer at Hildene.

“Our strategy is simple — we identify platforms that we like from a credit picking and management-style perspective that are sub-scale today, but that we believe can scale up over time. We then support them with capital and technical knowhow.”

“CLO platforms are a monetisable asset class in today’s market”

Dushyant Mehra, Co-chief investment officer | Hildene

Hildene has form in selling management platforms, after selling its own in-house CLO management business to Fortress Investment Group in 2016. More recently the firm entered a similar agreement to the Carlson deal with CQS, which was also in collaboration with Jefferies.

Hildene says the Carlson sale boosted the returns it made to investors relative to a more traditional CLO equity investment strategy, given equity valuations are down over the past 12 months.

“While most CLO equity originated in the timeframe of our sponsoring Carlson is most likely flat to down, given the platform economics, this was not the case for our Carlson equity investment,” says Mehra.

Despite Carlson receiving numerous offers, Hildene, which kept a minority equity interest in the Carlson CLOs sold, wanted an established CLO manager as the buyer. “There are many market players looking to buy platforms that have no legacy expertise in running CLOs,” says Mehra.

“The way the CLO market prices, risk is based on manager tiering, so it was important to us that the Carlson platform get sold to a manager recognised as top tier in the market.”

Hildene is seeking similar investments to support the growth of CLO managers. “We’re still exploring these opportunities, not just in US managers, but also in Europe, as there are growth areas in both markets,” says portfolio manager Tapan Jain. “In Europe, there’s a need for a risk retention capital solution for managers.”

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Global credit funds & CLO's

May 2022 | Issue 245

Published in London & New York.