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One of the hottest hedge funds on Wall Street received $1/4 billion from a small group of investors seeking an obscure corner of the capital market: mortgage obligations.
Diameter Capital earned 24% of its major hedge funds last year. It intends to use seed funds to build and sell its first six CLOs. These CLOs bundle loans from venture companies and use them to support the interest on some new loans. Paid. Each kind of debt has different levels of risks and rewards.
This asset class is at the edge of the market and is dominated by experts, but now demand is rising more broadly. The $250 million joint investment in Diameter by the pension funds of alternative asset management companies Apollo Global Management and Corbin Capital and renewable energy company Babcock & Wilcox also hints at a shift to the mainstream.
“CLO survived the market downturn intact,” said Bret Leas, who manages Apollo’s structured credit business. “As a result, the asset class continues to gain wider acceptance. It is no longer a niche market.”
Part of the appeal for investors is that the CLO market provides a way to increase returns, because low interest rates make high-yielding assets scarce.
According to data from Standard & Poor’s Global Market Intelligence Corporation, the total issuance of CLOs in the United States this year is running at a record speed, about 70 billion U.S. dollars. According to Citi, the current total issuance in the market is 770 billion U.S. The bank predicts that by the end of this year, this number will increase to 850 billion U.S. dollars.
Corbin Chief Investment Officer Craig Bergstrom (Craig Bergstrom) said: “In a world where there is not much obvious return, this is a source of return,” he pointed out that Diameter’s record is this 8.5 billion. The dollar investment manager decides part of the investment. Once interest is paid to debt investors in CLO, the rest will go to equity holders who provide seed capital.
In the past, people were skeptical of CLO. Before the pandemic hit, regulators had expressed concern that they had promoted risky loans with weaker standards and might lay the foundation for future credit crises.
But CLO participants feel right now. They believe that the strong rebound from the depth of the market decline caused by the coronavirus demonstrates the resilience of the structure and provides comfort to prudent investors, even if critics still point out that CLO provides A large amount of aid to the Federal Reserve has helped all credit markets—from bonds to loans—recover.
According to multiple industry sources, even CLO stock investors who are most vulnerable to the default of the underlying issuer will basically get positive single-digit returns at the end of 2020.
“CLO’s performance is perfect,” said Scott Snell of Tetragon, a credit fund that invests in CLO’s debt and equity. “If the Fed does not provide liquidity, CLO will be more adversely affected, but for all markets, not only CLO, but also more challenging.”
Many fund managers are eager to take advantage of demand, trying to enter the market or expand their business.
Therefore, some market participants expect integration among CLO managers. According to Citi, there are 135 CLO managers in the United States, of which 50 manage less than US$2 billion. Industry veterans said that depending on the fees charged and the size of the team, it usually takes between US$2 billion and US$3 billion in assets to achieve a balance of payments.
However, few mergers and acquisitions have appeared, and new and old managers seem to prefer cooperation similar to Diameter.
The launch of Diameter comes after York Capital handed over control of its CLO business to a new entity called Generate Advisors earlier this year and partnered with Kennedy Lewis Investment Management, which will provide $200 million in future transactions. Equity investment. Kayne Anderson raised $600 million in January to invest in his own and other managers’ equity in CLO transactions.
This is Apollo’s fifth partnership. It started with equity financing for CLO manager Gulfstream in 2011. The other three are somewhere in between.
“We prefer to build something that can be integrated into our DNA, rather than buying a company that is struggling on another platform,” said Scott Goodwin, who co-founded Diameter with Jon Lewinsohn. About ten years ago, the two met while working at the credit fund Anchorage, and Diameter was founded in 2017. Investing in the entire credit market, it has become one of the most prolific hedge funds in recent years.
Goodwin’s first boss at Citigroup was Jim Zelt, who is now the co-president of Apollo. Goodwin and Lewinsohn also established a long-term relationship with John Zito, Apollo’s deputy chief investment officer, which was consolidated after Apollo supported Diameter’s issuance of mortgage debt.
“A lot of people are talking about it, but there are very few CLO acquisitions,” Apollo’s Leas said. “When we can publish our own transactions or seed other managers, the prices that sellers expect to pay are usually not attractive to companies like ours. Nowadays, cooperation is a more likely way to launch CLO managers.”
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