CLO equity: not your average class
Transcript
Hi, I'm Ian Gilbertson, Senior Portfolio Manager and Co Head of US CLOs at Invesco.
Today I'll be discussing an interesting asset class, CLO equity that has garnered significant interest within institutional investment circles because of its attractive return potential, structural advantages and front ended return profile.
To begin, a CLO is a special purpose vehicle that issues securities to finance the acquisition of a diversified portfolio of bank loans.
Investors have the option to invest in either the debt or equity tranches, each offering distinct risks and return profiles.
CLO equity represents the subordinated tranche of a CLO structure.
This asset class is notable for its potential to deliver compelling absolute and risk adjusted returns.
As of November 2024, the global market for CLO equity assets stands at approximately $160 billion, representing around 12% of the $1.3 trillion CLO market.
One of the primary advantages of CLO equity is it's historically high income potential, with quarterly distributions historically ranging between 3 to 4%.
These returns are typically front loaded, allowing investors to receive distributions early in the investments life cycle.
This income can diversify other investments such as private equity, which often has a back ended return profile from its J curve.
CLO equity also offers potential structural benefits.
The financing is long term and locked in, enabling collateral managers to concentrate on active management without liquidity concerns.
This active management can enhance returns through strategic loan selection and trading.
However, the large variation in CLO equity outcomes highlights the importance of a manager's skill in generating outperformance, with bottom quartile managers significantly underperforming the median manager.
In conclusion, CLO equity is an interesting asset class with its potential for higher income, structural advantages, and diversification benefits.
It warrants consideration within an institutional investment strategy.
CLO equity is an interesting asset class with its potential for higher income, structural advantages, and diversification benefits.
Ian Gilbertson, Senior Portfolio Manager and Co Head of US CLOs at Invesco discusses in this video.
- CLO equity represents the subordinated tranche of a CLO structure.
- The global market for CLO equity assets stands at approximately $160 billion, representing around 12% of the $1.3 trillion CLO market. (As of November 2024)
- CLO equity also offers potential structural benefits
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.
