Why CLO equity now

Disclosures front:

Important information

This marketing communication is exclusively for use by professional clients and financial advisers in Continental Europe (as defined in the important information). Qualified investors in Switzerland and Professional Clients in Dubai, Jersey, Guernsey, Ireland, Isle of Man, and the UK; for Qualified Clients/Sophisticated Investors in Israel, for Professional/Qualified/Sophisticated Investors in Bahrain, Jordan, Kuwait, Lebanon, Mauritius, Oman, Qatar, Saudi Arabia, South Africa, Tunisia, Turkey, and the United Arab Emirates; for Professional Investors in Hong Kong, for Qualified Institutional Investors in Japan; for Institutional Investors and/or Accredited Investors in Singapore ; for Qualified Professional Investors in Korea, for certain specific institutional investors in Brunei for Qualified Institutional Investors in Taiwan, for Sophisticated or Professional Investors in Australia. For use with Institutional Investors in the US. The document is intended only for (i) Accredited Investors and (ii) Permitted Clients, as defined under National Instrument 45-106 and National Instrument 31-103, respectively. It is not intended for and should not be distributed to, or relied upon, by the public or retail investors.

Presenter: “Hi, I’m Ian Gilbertson, Sr. PM and co-head of US CLOs at Invesco, and 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.”

[Cut to Figure 2: CLO SPV structure]

Presenter: “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 risk and return profiles.”

[Cut to graphics showing ‘CLO Equity’ and related visuals]

Presenter: “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 (USD) CLO market.”

[Cut to Figure 5: Magnitude and direction of cash flows complement those of private equity]

Presenter: “One of the primary advantages of CLO equity is its historically high income potential with quarterly distributions historically ranging between 3 and 4%. These returns are typically front-loaded, allowing investors to receive distributions early in the investment’s lifecycle. This income can diversify other investments, such as private equity, which often has a back-ended return profile from its J-curve.”

[Cut to Figure 4: Strong median cash flows, though wide dispersion driven by manager skill]

Presenter: “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, trading, and refinancing. However, the large variation in CLO equity outcomes highlights the importance of manager skill in generating outperformance, with bottom quartile managers significantly underperforming the median manager.”

[Cut back to presenter]

Presenter: “In conclusion, CLO equity is a unique asset class. With its potential for higher income, structural advantages, and diversification benefits, it warrants consideration within an institutional investment strategy.”

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.

Structured finance securities such as CLOs entail a variety of unique risks. The performance of a CLO is affected by a variety of factors, including its priority in the capital structure of the issuer thereof, the availability of any credit enhancement, the level and timing of payments and recoveries on and the characteristics of the underlying receivables, loans or other assets that are being securitized, remoteness of those assets from the originator or transferor, the adequacy of and ability to realize upon any related collateral and the capability of the servicer of the securitized assets. Highly rated tranches of CLO

Debt Securities may be downgraded, and in stressed market environments, even highly rated tranches of CLO Debt Securities may experience losses due to defaults in the underlying loan collateral, the disappearance of the subordinated/equity tranches, market anticipation of defaults, as well as negative market sentiment with respect to CLO securities as an asset class.

Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default. The market for senior loans remains less developed in Europe than in the US Accordingly, and despite the development of this market in Europe, the European Senior Loans secondary market is usually not considered as liquid as in the US The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.

Alternative investment products, including private equity, may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. There is often no secondary market for private equity interests, and none is expected to develop. There may be restrictions on transferring interests in such investments.

The Flat Rock CLO Equity Returns Index seeks to measure the unlevered, gross of fee performance of US CLO equity tranches as represented by the marketweighted performance of the underlying assets of funds that publicly disclose their holdings and fair market values to the U.S. Securities and Exchange commission. The reporting funds satisfy certain eligibility criteria. The index inception date is September 30, 2014. The index is calculated quarterly on a 75-day lag. There were 490 CLO’s reporting as of Sept. 30, 2024.

Invesco disclosures

This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. These asset class assumptions are passive, and do not consider the impact of active management. Given the complex risk-reward trade-offs involved, we encourage you to consider your judgment and quantitative approaches in setting strategic allocations to asset classes and strategies. This material is not intended to provide, and should not be relied on for, tax advice.

References to future returns are not promises or estimates of actual returns a client portfolio may achieve. Assumptions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Estimated returns can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.

Indexes are unmanaged and used for illustrative purposes only. They are not intended to be indicative of the performance of any strategy. It is not possible to invest directly in an index.

Important information

This marketing communication is exclusively for use by professional clients and financial advisers in Continental Europe (as defined in the important information). Qualified investors in Switzerland and Professional Clients in Dubai, Jersey, Guernsey, Ireland, Isle of Man, and the UK.; for Qualified Clients/Sophisticated Investors in Israel, for Professional/Qualified/Sophisticated Investors in Bahrain, Jordan, Kuwait, Lebanon, Mauritius, Oman, Qatar, Saudi Arabia, South Africa, Tunisia, Turkey, and the United Arab Emirates; for Professional Investors in Hong Kong, for Qualified Institutional Investors in Japan; for Institutional Investors and/or Accredited Investors in Singapore; for Qualified Professional Investors in Korea, for certain specific institutional investors in Brunei for Qualified Institutional Investors in Taiwan, for Sophisticated or Professional Investors in Australia. For use with Institutional Investors in the US. The document is intended only for (i) Accredited Investors and (ii) Permitted Clients, as defined under National Instrument 45-106 and National Instrument 31-103, respectively. It is not intended for and should not be distributed to, or relied upon, by the public or retail investors.

By accepting this material, you consent to communicate with us in English, unless you inform us otherwise.

For the distribution of this document, Continental Europe is defined as Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Kosovo, Liechtenstein, Luxembourg, The Netherlands, North Macedonia, Norway, Portugal, Romania, Spain, Sweden, and Switzerland.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is being provided for informational purposes only, is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in any investment making decision. This should not be considered a recommendation to purchase any investment product. As with all investments there are associated inherent risks. This does not constitute a recommendation of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Past performance is not indicative of future results.

This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.

This document is issued in the following countries:

Australia This document has been prepared only for those persons to whom Invesco has provided it. It should not be relied upon by anyone else. Information contained in this document may not have been prepared or tailored for an Australian audience and does not constitute an offer of a financial product in Australia. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco. The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

You should note that this information:

·       may contain references to dollar amounts which are not Australian dollars

·       may contain financial information which is not prepared in accordance with Australian law or practices

·       may not address risks associated with investment in foreign currency denominated investments; and does not address Australian tax issues

issued in Australia by Invesco Australia Limited (ABN 48 001 693 232), Level 26, 333 Collins Street, Melbourne, Victoria, 3000, Australia which holds an Australian Financial Services Licence number 239916.

Further information on our products is available using the contact details shown.

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·       This material must be preceded or accompanied by the Characteristics & Risks of Standardized Options Document. To obtain a copy, go to: https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.

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