Survival of Fittest for Debut CLO Managers in Expansion DriveBy
U.S. firms among wave of entrants seeking to build platforms
Retention equity investment may be a game changer for exits
More than a dozen new managers are planning to launch CLO platforms in Europe, but as the list of would be issuers lining up to enter the market grows, so too are doubts as to whether all can succeed.
Firms including CIFC, King Street Capital Management, Fair Oaks Capital and Neuberger Berman have already opened warehouses for their first deal, and lead a pack of at least 13 U.S. and European managers hoping to join other managers, including BlackRock Investment Management, Onex Credit Partners and Och-Ziff Capital Management, who have already established European platforms in recent years.
This scene is reminiscent of the wave of U.S. managers who headed to Europe ahead of the credit crisis, and some have questioned whether the market can accommodate them all.
As more firms jump on the bandwagon, some CLO managers contend not many will make enough money to justify the move, and may be on the block in two to three years.
That was the experience after the last pre-crisis influx of new managers, when many either headed home or sold up to more established managers after their efforts to garner sufficient asset under management failed.
Race Against Clock
The burst of additional new managers could diversify the issuer base, boost fees for arrangers and raise demand for leveraged loans and high-yield bonds.
These firms would increase the number of post-crisis European issuers closer to 60 from 43 now, according to Bloomberg data. As many as 99 managers issued CLOs in the U.S. last year, Wells Fargo said in a recent note.
But it’ll be a race against time as the managers try to amass AUM to create platforms large enough to sustain their teams before the credit cycle turns. First movers may have the best chance of success, both in terms of hiring the right professionals, as well as getting investors’ attention.
Ticking the boxes on investors’ check lists will be crucial to secure investment.
Top of the list is establishing a team of experienced credit analysts on the ground in Europe, led by a seasoned portfolio manager with strong sponsor and arranger relationships, and an understanding of what works from a credit, documentation and structuring perspective.
Access to a good supply of loans is also essential, especially given the ongoing importance of sponsor relationships in the European loan market. A CLO arranger with a strong leverage finance platform may be able to help a new manager ramp its warehouse, while some U.S. managers may be accommodated by loan arrangers based on the strength of their presence in the U.S.
Investors will also be looking for a manager with long term plans for the European market--as opposed to a hedge fund with a shorter term build and sell CLO strategy--as well as a water tight risk-retention strategy. Some U.S. firms may already have raised a risk retention vehicle to comply with U.S. risk retention and may be able to repurpose this for European retention equity.
Even if these investors are able to tick all the boxes, some ask whether much more expansion is desirable and ask whether investors want more diversity or whether the loan market can support such an increase in demand.
The size of the European market pales in comparison to the U.S. Borrowers raised 57 billion euros ($68 billion) of new money in the European leveraged loan market in 2017, compared to about $300 billion in the U.S. market.
Oversupply has already caused European CLO spreads to widen this year, while loan spreads have only recently stabilized after a long period of contraction driven by strong demand. And more issuers may not necessarily lead to greater CLO supply; it may instead curtail the number of transactions each manager is able to print per year.
For investors, greater issuer choice may be good news only if those issuers offer a compelling alternative to what is already available. European CLO collateral pools are already less heterogeneous than in the U.S, and this puts yet more importance on the management style and track record of any new manager.
And what if all these wannabe issuers aren’t able to make a success of establishing a European platform?
Many of the pre-crisis manager influx were able to find buyers to sell to enabling them to move on. This time around that might not be so easy due to the amount of equity managers now have invested in their own deals due to risk retention. Issuers are required to retain this retention equity for the life of the transaction, which could hamper efforts to sell a business.
- Two new managers have already priced debut European CLOs this year: Permira Debt Managers and Voya Alternative Asset Management
- Fair Oaks this week signed a new warehouse agreement with Deutsche Bank for its first European CLO
- Neuberger Berman has laid down plans for its return to the CLO market via Barclays, having issued pre-crisis CLOs
- Sound Point Capital Management has hired Russell Holliday to help build out their European par loans and CLO business
- CIFC has announced plans for a European credit strategy including CLOs
- Credit Value Partners has hired Brian McNamara to run its European CLO business
- King Street is working with Citi on its debut European CLO
- Hayfin is working with Citi on its debut BSL European CLO
- Other firms with plans to expand into Europe include Angelo Gordon & Co and Anchorage Capital Group LLC
(Sarah Husband is a leveraged finance strategist who writes for Bloomberg. The observations she makes are her own and not intended as investment advice.)