Private investors commit €5.2m to European CLO fund targeting high cash yield from corporate loans to large multinational.
Clients of Connection Capital, the specialist private client investment business, have invested €5.2m in the final close of a European Collateralised Loan Obligation (‘CLO’) fund managed by Permira Debt Managers (‘PDM’), one of Europe’s leading specialist debt investors.
The Permira Sigma V Fund targets a high cash yield from a diversified portfolio of senior secured European corporate loans to large multinationals, which have an average enterprise value of at least €1bn. The fund’s strategy targets mid-teen net returns and is expected to make regular distributions after the two year investment period. Connection Capital says that the potential to generate accelerated cash returns and to increase resilience within private investor portfolios via greater diversification across ‘uncorrelated’ alternative assets were among the opportunity’s key attractions, particularly as volatility in public markets continues and interest rates remain low.
Resilience to market stress is built in because most of the assets in the underlying CLO portfolios are senior secured loans, and also because the CLO structures are not mark-to-market vehicles, hence, would not be forced sellers of assets in periods of price volatility.
The Permira Sigma V Fund has been deploying capital over the past 12 months, aiming to build a diversified portfolio of 30-40 investments across 15-20 different managers – with the intention to avoid the concentration risk of a single CLO. Each CLO holds on average 100 corporate loans, hence, CLOs are inherently diversified.
This is the second time Connection Capital clients have partnered with PDM on the Sigma Funds. With its flexible approach, PDM’s Sigma funds have demonstrated an ability to deploy capital in a range of market conditions, generating strong returns across prior vintage funds. PDM is the debt management and advisory arm of global investment firm Permira.
The rationale for investing in European CLO Equity now
CLOs performed strongly during the last cycle, thanks to their robust structures. Pre-financial crisis, CLO equity outperformed other alternative asset classes and due to the inherent diversity in the CLO portfolios, they have the ability to withstand relatively high default rates. CLO collateral default rates are currently 0% and peaked at 6% in 2009*.
CLOs can also benefit from credit volatility, as CLO managers can add higher yielding assets to their portfolios if credit spreads widen, and from rising interest rates as CLO liabilities are typically floating rate instruments. Since liabilities are typically just 90% of the asset balance, rising rates should also boost equity distributions.
Claire Madden, Managing Partner at Connection Capital says, “The current market opportunity in European CLO equity is compelling and makes this an attractive private portfolio diversifier.”
“This investment satisfies private investors’ thirst for yield and gives them access to an asset class which is not impacted by market values – so it is well-placed to withstand market stress and even to benefit from credit volatility and interest rate rises.”
“Over the last ten years, Permira Debt Managers has carved out a premier position in its niche and has demonstrated an excellent track record across its previous Sigma CLO funds. Looking ahead, given its flexible strategy, which seeks out the best opportunities from whatever market segment offers the most attractive opportunities at any point in time, we believe it has the potential to go from strength to strength.”
“Although the usual investment minimum is €10m, making it essentially open to institutional investors only, we’re delighted to be able to use our excellent relationship with Permira to enable our clients to participate.”