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News
Rich fees help pull in growing crowd of CLO debutants
by Shant Fabricatorian
US financial giant State Street, private equity shop Abry Partners, the Princely family of Liechtenstein’s LGT Capital Partners, and even India’s Vivriti Asset Management are among a burgeoning list of asset managers looking to get into the CLO management business.
The CLO market has now grown globally to USD 1.4tn in size. Jim Stehli, co-head of recent entrant Polen’s CLO platform, said the increasingly broad acceptance of CLOs has contributed to elevated interest.
“The market is trading, on average, a billion dollars of CLOs per day on the secondary market. You’ve got size and scale, and strong performance. So it makes sense that more managers would want to enter the space, either as investors or as issuers,” he said. Polen debuted as a new CLO manager in February this year.
You’ve got size and scale, and strong performance
Jim Stehli
Co-head
Polen
The fees for managing CLOs can be rich compared to traditional asset management businesses such as bond funds. CLO managers pull in some 40bps to 50bps for assets under management, with additional incentives thrown in for good performance. And setting up a CLO shop has fewer barriers to entry compared to other alternative credit strategies, such as direct lending, according to market participants.
Some of the hopefuls are new to CLOs. Others are managers from the US or Europe looking to conquer new territory abroad. They are in varying stages, from exploring whether a CLO makes sense, to having hired CLO experts, to prepping a warehouse as a prelude to issuance.
Kick starting a CLO management business is not without risks. To succeed, a new shop should be able to issue regularly.
“One thing that derails CLO managers is when they cannot issue consistently and they don’t offer liquidity, and their debt does not become liquid,” said Brian Yorke, portfolio manager at Muzinich, which is gearing up to enter the European market as a manager.
For investors, new managers can offer diversity and good returns, a trade-off for the lack of a track record and thus the extra due diligence.
“We have seen historically that some of the newer managers in Europe, with between three and six deals, have done quite well, with lower loss, lower share of B3 and much lower share of triple Cs,” said David Altenhofen, head of investments at Accunia.
“A key problem, of course, is that we don’t have much data,” he added. “Some managers might have [existing] leveraged loan portfolios, so that’s one metric, but typically, the quantifiable elements for a debut manager are difficult to assess.”
