Guggenheim CEO-Backed Nonprofit to Invest in Chicago CLO Managerby
Academy Group will invest in CLOs for money manager CFIP
Nonprofit commits $160 million for 8 new CLOs over two years
A credit investment manager operating in a corner of Wall Street’s securitization machine has found an unconventional partner in its effort to adapt to post-crisis rules requiring it to keep skin in the game: a charity.
Collateralized loan obligation manager Chicago Fundamental Investment Partners, CFIP, has partnered with The Academy Group, an education-focused nonprofit backed by Mark Walter, the co-founder and chief executive officer of Guggenheim Partners, to fund its CLO risk retention investments. The arrangement is mutually beneficial: CLO equity is just the first of many areas of investment that the non-profit intends to pursue in order to generate revenue to fund itself, according to Academy executives.
In a first-of-its-kind alliance, Academy, whose mission is to engage with underprivileged youth at a young age to groom them for careers in finance, bought a minority ownership interest in CFIP last October. As part of the deal it has committed $160 million for purposes of satisfying risk retention compliance under Dodd-Frank on CFIP’s upcoming CLOs. The funds will be invested in CLO equity.
There will be between four to eight new CFIP-managed CLOs over the next two years, with the first one surfacing in the next three to six months, that will use funds from Academy to comply with the new rule, according to Brad Couri, a managing principal at CFIP.
Steady Cash Flow
“When the Dodd-Frank rules on risk retention got passed down, we spoke to a number of different potential capital partners, but the primary goal was to find a way to combine philanthropic goals with the CLO business," said Couri, who worked with Walter nearly 30 years ago, when they were both lawyers for First Chicago. “This charity should have years and years of steady cash flow."
CLOs pool high-yield corporate loans and slice them into securities of varying risk and return, typically with ratings from AAA down to B. The lowest portion, known as the equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their payouts reduced when loans backing the CLO default.
The risk-retention rule, which went into effect Dec. 24, is intended to make sure managers are on the hook for at least a portion of the risk in their deals.
The first deal for the new partnership was the resetting of a CFIP CLO from 2013 to make it comply with the new regulation. Under the deal, which was priced on April 11, $13 million of funds from Academy will be deployed for the rule, Couri said.
Academy has also agreed to backstop about $1 billion of the top-rated tranches of the next four CFIP CLOs. This means that the charity will be on the hook to buy the debt in a market downturn.
Couri formed CFIP as a boutique investment firm in 2006 with Levoyd Robinson after they left hedge fund Citadel, where they managed credit portfolios, including a distressed fund.
Investment in the CLO market was a perfect first step toward building a reliable stream of revenue for the non-profit, said Timothy Knowles, the former head of University of Chicago’s Urban Education Institute who now co-leads Academy with Shayne Evans, the former CEO of University of Chicago Charter School.
Academy plans to use its partnership with CFIP as a template and intends to team with “ten companies in a diverse set of industries to build a new generation of highly-skilled, resilient leaders” Guggenheim’s Walter said in a statement.
"This type of business arrangement is consistent with what we’ve been seeing recently," said John Timperio, a partner at law firm Dechert LLP. "We’ve increasingly seen non-traditional CLO equity investors partnering with managers they trust and are friendly with, and who see the world the same way."
While Academy’s partnership with CFIP may be the first expressly designed to fund risk retention, state pensions and endowments have recently been investing across the entire CLO structure and in various risk retention funding vehicles, Timperio said. In many ways, risk retention has provided investors access to CLO equity on favorable terms, he added.
CLO equity returns were as high as 7 percent during the first quarter, according to Nomura research analysts, but in recent years they have paid in the mid-teens.
“This type of set-up could be transformative in how not-for-profits fund themselves,” Couri said. “We plan to discuss the same structure with others down the road.”