Economic headwinds, spread volatility and intense competition for loans in a shrinking primary market are perfectly rational reasons to conclude that launching a debut CLO today would be a brave step, however 25 (18 percent) of the 141 managers that have issued a US CLO since January 2018 were new entrants to the market, creating a healthy and diverse landscape that offers investors choice and the opportunity to pinpoint a manager whose investment style and background matches their investment objectives.
There is no doubt that successfully launching a CLO platform comes with significant challenges but the rewards would appear to be worth the risks and the effort given the continued flow of new managers entering the market. One of the main obstacles to launching a CLO platform is sourcing the equity; unless the manager has access to its own source of funding, be it intra group or from other managed funds, they are required to seek backing from a third party investor who is willing to write an equity cheque and who is committed to do so for at least a few deals.
New managers target a minimum of three or four deals to build a track record. Finding that level of early investment commitment has proven particularly challenging according to some of the newer managers that we have spoken to who are all too aware of the catch 22 scenario whereby investors want to see that track record in place before deciding to invest. New entrants recognise that this makes launching a CLO platform extremely difficult because investors are reluctant to invest in an unproven manager where style and performance is unknown and because, more significantly, new managers invariably pay a wider spread penalty in comparison to seasoned managers and often need to compromise in other areas such as management fees, to get their first deals away. Other challenges exist in terms of finding the collateral in this mature and highly competitive market. Investors legitimately want to know whether new managers will have the traction to demand allocations when desirable loans are issued. New entrants look to negate these barriers by making key strategic hires from within the CLO market to leverage off existing relationships and experience to bolster credibility in the market.
The appetite however is apparent as we continue to see new managers enter the market. For new managers to be successful, and to attract outside investment and hopefully that key anchor investor who is able to...