Creditflux: Managers seek to raise captive funds as enthusiasm for CLO equity increases

By Lisa Lee

One of the factors underpinning the record pace of CLO issuance this year has been a growing enthusiasm for equity tranches. An increasing number of managers are raising captive equity funds as well as nabbing third-party cash for their deals.

MidOcean raised USD 100m of CLO equity for a new captive strategy in less than a year. Oak Hill Advisors had the initial close for a captive fund with a hard cap of USD 800m. Meanwhile, investors joke that it seems all managers are trying to fundraise for their own captive funds.

Third-party capital has returned to equity investing, causing oversubscription in many recent deals, said sources. That’s a drastic shift from last year when these investors preferred the mezzanine slices of CLOs and most issuance was backed by captive equity.

“Overall, equity is an interesting trade now. Primary equity is starting to look quite attractive for the first time in a long while,” said Chandrajit Chakraborty, founder of Pearl Diver Capital.

For captive funds, the cash is coming from around the globe, ranging from Asia to the Middle East to the US, according to sources. Family offices, sovereign wealth funds and insurance firms are particularly drawn to the bottom of the stack of CLOs.

Still, raising captive capital remains challenging, despite GoldenTree closing a USD 1.3bn CLO equity fund earlier this year. Market participants describe it as being “like fairy dust”.

“There is more interest in captive equity funds, but the uptake has not been as significant as, for example, for private credit funds,” said Gretchen Bergstresser, co-chair of CVC Credit, which closed a USD 800m captive CLO equity fund last year. “It can take a more sophisticated investor base that is not only comfortable with the underlying asset class, and CLO structures, but also the managers and their long-term performance.”

The arb — the figure that’s the focus of the market irrespective of data or history — is improving, which helps drive captive fund raises, said sources.

“We are seeing a return of primary equity buyers focused on higher cash-on-cash and wanting to lock in lower liability spreads,” said Young Choi, portfolio manager at King Street, when talking about CLOs.