Proving their ability to deliver favorable returns and minimal defaults even through the recession, collateralized loan obligation (CLO) funds have resurfaced as lucrative investment vehicles for the private debt world. Antares Capital, Carlyle, Madison Capital, Trinitas Capital and Wellfleet have all raised new CLO funds, which provide lenders with long-term, stable, cost-effective, well-protected financing.
A CLO fund is a security backed by a pool of debt, often times low-rated corporate loans, where payments from middle-market business loans are collected and repaid to limited partners. The CLO structure had proven to be beneficial for fund managers until the financial crisis, when it got something of a bad reputation, due to guilt by association with mortgage-backed securities. Since 2012, CLOs have been making a comeback, in part due to their ability to provide a handful of varying risk-to-reward profiles. CLOs, as opposed to unitranche investment vehicles, also allow firms to access a broader network of potential limited partners, some of whom would not be able to invest directly in middle-market loans.
“Let the structure work for you,” says Gibran Mahmud, CEO of credit-focused investment management firm Trinitas Capital Management LLC. Boutique firms who specialize in managing debt funds, such as Trinitas Capital and Wellfleet Credit Partners, have remained consistent in their strategies. In June, Trinitas Capital raised $717 million for the firm’s sixth CLO since going to market in the third quarter of 2016. Mahmud says the firm anticipates, on average, raising capital for either two or three CLOs a year. Wellfleet on the other hand, the performing credit business of PE firm Littlejohn & Co., also pooled together $406 million to back middle-market businesses by senior secured loans.
Madison Capital Funding LLC, the directing lending arm of New York Life Insurace Co., has also raised a new collateralized loan obligation fund with $325 million in capital commitments. The fund is the firm's sixth since its inception in 2001 and will have a reinvestment period, where a manager can reinvest all principal proceeds from loans, of nearly five and a half years. Madison Capital has invested more than $26.2 billion in net funded commitments in more than 997 financing transactions to date.
Banking on the growth of private debt, Antares raised its first CLO fund in May with nearly $2.1 billion in commitments, the largest CLO raised in the U.S. since 2006, according to the firm. “Now that we’re a standalone firm, we manage our own balance sheet and source our own funding,” states Antares head of structured products Vivek Mathew. “One of our key objectives is to diversify our funding sources as much as possible. Given the types of assets we originate, the broad investor interest in the private credit space, and the positive reception that our most recent CLO received, we expect to continue to utilize CLOs as a significant way to support the ongoing growth of our middle-market loan business.”
So far in 2017, the Carlyle Group (Nasdaq: CG) has closed two CLO funds raising approximately $1.2 billion in capital as well. The PE firm’s most recent fund, Carlyle US CLO 2017-2 Ltd, closed in June with $610 million in financial commitments following its predecessor, which collected $612 million. No stranger to the debt structure, Carlyle also raised four CLO funds in 2016. The closing of the new fund brings Carlyle’s CLO business to a total of $18.8 billion in assets under management.
The resurgence of CLOs across the middle market backs the notion that this managed, multi-tranche investment vehicle is indeed working for both fund managers and investors, especially as the debt fund sector is not yet as crowded as other areas in the private capital world.