Our Core Credit Strategy - CLOs
What is a CLO?
CLO Stands for Collateralized Loan Obligation. A CLO is a portfolio of agency-rated leveraged loans that is securitized and managed as a fund of loans.
CLOs first appeared in the market during the early 1990s. They evolved from collateralized mortgage obligations (CMOs) and collateralized bond obligations (CBOs) which hold mortgages and corporate bonds as collateral.
CLOs are financed by a series of tranches that are primarily interest-paying bonds (90%) and CLO equity (10%).
Most CLOs are “arbitrage CLOs” as they capture an excess spread between the portfolio of loans and the CLO debt used to finance the purchase of the loans. CLO equity investors receive the majority of this arbitrage spread.
Since the 1990’s, CLO equity has generated double digit returns to investors while experiencing below market risk (i.e. versus S&P 500).
As CLO collateral is primarily senior secured loans, they benefit from priority of payment in the event of a corporate default.
The CLO Market
The US Collateralized Loan Obligations AUM is currently over $1.0 trillion.
This asset class has enjoyed tremendous growth tripling in just 10 years from $300bn.
The asset class is the lifeblood of the Private Equity/Buyout market providing over 70% of acquisition financing.
CLOs are intentionally designed with robust structures to survive the deepest of financial crises (e.g. the dot.com bust, GFC and COVID-19). It is truly a battle tested, reliable source of steady income to investors.
The CLO industry is highly concentrated with the top 25 managers holding over half of the AUM. The remaining half of the market is managed by over 140 managers creating opportunities for consolidation and EBITDA expansion.
Very few managers exist that have fully leveraged technology to provide leading industry returns to their investors.
The market is starting to see new entrants bringing tech-driven investment approaches which will disrupt the sleepy, mostly analog industry and steal market share.