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How CLO managers muscled in on the LBO market

Love them or loathe them, institutional investors are now an increasingly important fact of life for LBO financial sponsors. CLOs now account for more than 30% of the market in Europe and are starting to venture into every part of the LBO structure. But if things go wrong, there is now a fund manager across the workout table, not a friendly banker. Louise Bowman reports.

How to judge manager performance

CDS on leveraged loans


LOW VOLATILITY ASSETS and zero defaults. Leverage yourself five to 10 times at historically low rates and make a guaranteed 15% to 20% IRR. It is not hard to pitch the CLO market to prospective asset managers, many of whom seem to see the asset class as the holy grail of the European CDO market.

Barely a month goes by without a raft of debut deals from start-up managers or European CLO transactions issued by large US players. CLOs now gobble up more than 30% of the European LBO market – and together with hedge funds account for 40% to 50% of buyers of leveraged loans. And if their appetite remains unchecked, that percentage will soon be a lot bigger – transforming the fundamental dynamics by which the European LBO market has operated since its inception.

According to Standard & Poor’s, institutional buyers now account for 43% of the leveraged loan market in Europe and there are 62 frequent fund buyers. (Penetration is some way short of that in the US, however, where 255 funds account for 68% of the market.)

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