Global credit funds & CLO's
May 2020 | Issue 223
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May 2020 | Issue 223
Waiting game pays off for European pension fund
Sayed Kadiri headshot
Sayed Kadiri
Finnish pension fund Ilmarinen has been investing more in European CLO tranches after valuations dipped to their lowest levels in a decade, thanks to a distressed CLO fund strategy it put in place two years ago. Back then, European CLO spreads had reached 2.0 tights with four-year reinvestment triple A tranches pricing at 68 basis points.
“We felt that CLO valuations were close to their peak so decided to assemble a fund that could capitalise on any dislocation,” says Janne Gustafsson, senior portfolio manager at Helsinki-based Ilmarinen.

It can take up to a year for institutional investors to decide where to allocate and to negotiate with third-party managers. This means they often miss out on opportunities.
Ilmarinen’s tactic, which took six months to finalise, requires the fund manager to have the patience to hold off from drawing down capital for long periods.

“We structured it as a draw-down fund with a five-year investment horizon,” says Gustafsson. “To ensure the fund manager was incentivised to draw down the capital from us at an appropriate time, we agreed a low running management fee with a high incentive fee.” Such an arrangement can backfire if no distressed wave materialises, but the five-year window was created to give the fund manager (whose identity has not been disclosed) the ability to wait for an opportunity.

Gustafsson says that the fund structure delivered its desired results, with the manager drawing down all available capital in the past month or so. During this time, CLO triple B tranches have dropped about 20 points to the low 70s, with double B tranches trading at least 10 points back.
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“We decided to assemble a fund that could capitalise on any dislocation”
Janne Gustafsson, Senior portfolio manager | Ilmarinen