But the managers, structures, liquidity and general terms vary significantly and investors should devote some time to selecting the optimal manager and investment vehicle.
Miguel Ramos Fuentenebro is partner at Fair Oaks Capital, adviser to Fair Oaks Income fund
CLO checklist
A non-comprehensive due diligence list for investing in CLOs should include at least a review of the following features:
Credit resources
Investing in CLOs requires dedicated resources able to analyse and monitor the loans in the underlying portfolios, identifying any underperformers early. Teams should be experienced but nimble enough to be able to sell any potentially non-performing loans well before credit problems are apparent to the general market.
Liquidity
CLO investments are medium-term investments that require committing capital for a number of years. Some vehicles are listed on a stock exchange but many of them are ‘permanent’ – they have no maturity or redemption features. A CLO can return capital to investors after five to seven years, so a fixed maturity vehicle can take advantage of this. Receiving interest and principal as it is generated shortens the duration of the investment and avoids the reinvestment and liquidity risk present in many permanent listed investment vehicles.
Independence
When a new CLO is launched, the CLO manager will benefit from a significant amount of new assets under management and will be paid a fee for managing these assets. The investor in the CLO income note has to ensure that the CLO manager’s interests are aligned with theirs and that any fees are negotiated on an arms-length basis. Independence between the CLO manager and the investor in the CLO income note is paramount to avoid conflicts of interest.
