Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
IOOF has become the first external client for a new strategy from Nassau Private Credit, a US-based specialist global credit manager, with a US$50 million investment.
The strategy invests in collateralised loan obligations (CLOs) focusing on ‘control equity’, mezzanine and debt tranches of third-party managed instruments.
Nassau Private Credit has been represented in Australia by third-party marketing firm Akindred, which managed to get in one face-to-face meeting between the manager and client before last year’s COVID lockdown.
Manish Utreja, the head of alternatives at IOOF, said CLO Equity was an underinvested area of the market and a more efficient way to access senior-secured broadly syndicated loans. The firm, therefore, undertook significant due diligence. He saw the CLO equity exposure in a portfolio as complementary to middle-market direct lending either in the alternatives or private credit allocations.
He also said that IOOF was impressed with the Nassau Private Credit team, which launched the strategy on July 1, 2019, and its unique approach in managing the full cycle of a CLO’s investment horizon, including upfront financing.
The firm’s parent, Nassau Financial Group, has been investing in the strategy since inception.
Utreja said: “The ability to achieve manager diversification in the CLO equity space in one portfolio, as this is not a captive equity investment, and alignment of interests with the Nassau Group were also key considerations.
Their extensive knowledge of the CLO market and other participants in it gave us the confidence we needed that not only have we chosen the correct manager but also an advisory partner for the market as a whole.”
Russell Pemberton
The co-portfolio managers for the fund are Bruce Brittain and Russell Pemberton, both based in New York. They said last week that they first met in 2001 when working on a CLO deal structure, and subsequently both had various roles on the sell-side of credit before coming together again to launch the strategy at Nassau. Pemberton has had 23 years’ experience in CLOs, at RBC, RBS and J.P. Morgan. Brittain has worked in structured credit for about 20 years, at Morgan Stanley, Morningside Credit and South Side.
Brittain said: “We have effectively been involved in every stage of the CLO lifecycle. The CLO market is opaque and unless you have seen it from the inside, it’s a difficult market to navigate. You need to know all the participants, understand how they are incentivised and then start to put together the very interesting puzzle that is CLO equity.”
CLO equity is at the bottom of the capital structure but is not as risky as it may seem. It has a number of attractive features, Brittain says.
“We are in a unique position as equity holders, especially with control equity (control equity means having at least 51 per cent ownership),” he says. “The investments are backed by broadly syndicated bank loans that are underwritten by regulated banks and actively traded. Further, underlying assets are at the top of the borrower’s capital structure from a risk perspective. It’s a US$1.2 trillion market.”
Pemberton says that a lot of the risk can be mitigated. “We act as the steward for the transaction and use portfolio construction to mitigate the tail risks.”
CLO equity offsets the typical ‘J curve’ of returns in alternatives generally through a “cash on cash” payment schedule, effectively meaning the holders are paid first.
The two portfolio managers collaborate on all aspects of the business, they say, and when in unique situations they can challenge each other. They call their version of alpha “structuring and stewardship alpha”.
David Edwards, a director and head of sales at Akindred, said the product sat “very nicely” alongside private credit or can be an alternative product choice. “People are really looking into what has become more than a traditional credit market,” he said. “This is a diversifying strategy because it can produce returns through different credit cycles.”
Edwards, who works with fellow director Will Britten at the boutique market firm, said Akindred was delighted to have brought IOOF and Nassau Private Credit together, and bring a unique product in the CLO market to Australian investors.
Greg has worked in financial services-related media for more than 30 years. He has launched dozens of financial titles, including Super Review, Top1000Funds.com and Investor Strategy News, of which he is the former editor.
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