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Capital Markets

CLOs: Sponsors look to cash in on credit opportunities

Several private equity firms are poised to launch new debt management businesses as the European CLO market goes into overdrive.

Timing your entry into a new market is tricky. But when the number of potential competitors has doubled over the previous 12 months, things probably get a lot trickier. This is what has happened in the red-hot CLO market: there were 35 managers in the European CLO market in mid-2006 whereas little more than a year ago there were only 16. And although CLOs accounted for roughly 75% of the European cash CDO market in 2005, so far this year they account for a full 92%.

This rapid growth has largely resulted from the many US CLO managers that have set up shop in Europe. Several of these are US CLO managers with a private equity sponsor parent: Bain Capital, Carlyle Group and Blackstone Group are the obvious examples. But hedge funds have been moving into this space as well: London-based CQS brought its debut CLO in June via Morgan Stanley; another hedge fund, Elgin Capital, brought its first deal earlier this year via Citigroup.

Their ranks could be further swollen by several European private equity sponsors that are now understood to be looking closely at the merits of setting up debt management businesses themselves.

They would not be the first to do so.

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