Why CLO Equities - Market Trends and Investor Perceptions

Jeff Reemer

Ian, where have you seen investor interest in CLO equity? And what do you think is driving it?

Ian Gilbertson

Yeah. Given the growth we've seen in the market, there's been a lot of potential investors who have gotten up to speed on the asset class and done a lot of work to understand how CLOs work with over a trillion of outstanding US CLOs, plus another 300 billion on the European side.

Investors are really starting to see the benefit of the CLO asset class.

Key themes we continue to hear from investors who are looking at CLO equity are the potential for competitive quarterly income. The front ended return profile and the diversification benefits that come from this versus private equity or fixed income and other structured products.

Jeff Reemer

Ian, what role does CLO equity investments play in potentially enhancing portfolio diversification and yield for pension plans?

Ian Gilbertson

Well, first, let's level set that. An Investment in CLO equity provides levered exposure to a pool of loans either broadly syndicated or private credit. And it allows an investor the opportunity to capture the excess spread on the underlying loans, net the cost of debt, credit loss and fees.

Over time, this spread arbitrage has delivered robust current income, with median annual distributions of 13.6% in the US and 15% in Europe. These cash-on-cash distributions are comparable to the higher yielding allocations in a pension portfolio such as private equity, opportunistic credit, or private investments.

In addition, CLO equity tends to have relatively low correlation to these asset classes, making it even more compelling to the investor from a diversification standpoint.

Jeff Reemer

Ian, what are the most common misconceptions institutional investors have about CLO equity and how do you address them in your conversations?

Ian Gilbertson

Well, I think going back in time, you would have seen that a lot of institutional investors would have thought that CLO equity is really complex asset class and just too complex to pick up the pencil and do the work on.

I've been impressed by the level of sophistication that institutional investors have brought to recent discussions on CLO equity. Pension investors, in particular, have done a lot of work on the asset class over the past several years. Many participants have highlighted how CLO equity complements their private equity allocations, or how its current income profile enhances that portfolio diversification. So most of the conversations I'm having today are more collaborative, where I serve as a resource to the key partners of Invesco to explain how they can really use CLO equity within their overall portfolio.

There are a few ways to access CLO equity, and I've enjoyed working closely with clients to ensure that they make good decisions on how they can maximize the benefit of CLO equity within their overall strategy.