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Do CLO managers need to be big to compete? Investcorp thinks so. That’s why it bought US manager Marble Point Asset Management in a deal announced earlier this month, said Jeremy Ghose, head of Investcorp’s credit management division, in an interview with 9fin.

“We had been underweight in the US credit markets for a long period and had been scouting the market for an appropriate target,” he said.

The acquisition represents a bet on the future of floating rate corporate debt for the Bahrain-based fund manager, specifically in the US, even as both loan and CLO issuance have slowed and investors eye a possible recession.

Investcorp paid $200m for Marble Point, which had $7.3bn in AUM as of this month, according to various reports. The deal brings Investcorp’s total AUM to $50bn and its credit AUM to $22bn.

The asset manager now counts itself as one of the top 15 CLO managers in the world, Ghose noted. Any additional near-term CLO acquisitions are likely to be solely management contracts as opposed to full platforms, he added.

Some recent M&A deals show that at least some other asset managers agree on the importance of scale in the CLO industry. Earlier this year Carlyle consolidated the biggest CLO manager in the world when it acquired CBAM, and Franklin Templeton acquired Alcentra in a deal that included the latter’s CLO businesses.

The belief is that larger players will be better placed to navigate the CLO market’s downswing in terms of both the issuance and performance of leveraged loans.

One of the advantages to running a bigger CLO platform is that larger players tend to get more favorable allocations in the premarketing stages of new loan offerings, helping them to ramp warehouses more quickly.

Specifically, Ghose noted that the platform had the size and ability to lend as much as $100-$200m per new deal.

“We become one of the go-tos in the early stages of the transaction,” he said.

This could be a competitive advantage amid a drop in leveraged loan supply. Year-to-date institutional loan issuance totaled $252bn as of 21 December, according to JPMorgan. That is down 70% compared to the $834.8bn issued through the same period last year.

CLO formation has slowed in this environment — issuance through 31 October 2022 was $113.3bn across 244 CLOs, down from $149bn across 302 CLOs through the same period in 2022, according to S&P. But the ratings agency still projects $130bn in total CLO issuance for 2022, which would still be second highest total on record.

For his part, Ghose expects leveraged loan issuance to rebound towards the middle of next year, once rate hikes end, and there is more clarity about a possible recession.

“In my view both of those things — rate hikes coming to a halt and more visibility as to the shape of the slowdown and recovery, then the capital markets will normalize very quickly,” he said. “There is a wall of money to be invested — not least of which is PE sitting on $1.5trn of dry powder.”

Investcorp is aiming to issue four new CLOs in the US and three in Europe in 2023, depending on market conditions.

There’s also hope that larger asset managers will still be able to attract debt investors at a time when credit concerns are increasing in the leveraged finance universe.

According to S&P, the total amount of bond and loan debt rated CCC+ and lower reached a 17-month high of $230bn in September. The ratings agency also expects the speculative grade trailing-12-month default rate to reach 3.7% in September 2023, versus 1.6% in September 2022.

If the downward trend continues, a manager’s scale may be a crucial way of attracting investors to new CLOs.

“In volatile times, the bigger managers with a deep bench and wider scale are more able to attract investors across the tranches that are required to put CLOs together,” Ghose said. “Scale is also important because we need to be relevant to our counterparties,” such as private equity sponsors and investment banks, he said.

Investcorp was formed in 1982. Aside from credit, it invests in assets including private equity, real estate and infrastructure. Marble Point is led by founder Thomas Shandell, who was previously a founding partner at GoldenTree Asset Management. The deal is slated to close in 1Q 2023.

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