CLOs allow investors to potentially get higher-than-average returns in exchange for taking on greater default risk.
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A major player on Wall Street may be CLOsing in on CLOs.
Goldman Sachs is the lead bidder to buy Kansas-based Palmer Square Capital Management, a collateralized loan obligation powerhouse overseeing $37 billion, Bloomberg reported Tuesday. While a deal may not be reached, the talks illustrate Goldman’s continued efforts to expand its footprint in the alternative credit markets, and an opportunity to beat alt heavyweights like Apollo at their own game.
CLOs are pools of floating-rate loans, often below investment grade, that allow investors to potentially net higher-than-average returns in exchange for taking on greater default risk. It’s no wonder they’re appealing to investors (and alts managers): They can provide double-digit returns in today’s 5% rate environment, and the structures are designed to limit risk, in part through diversification.
“In a market environment shaped by inflation uncertainty and evolving monetary policy, CLOs represent a distinct segment of the fixed income landscape,” Fidelity portfolio managers wrote in a white paper earlier this year. “Their floating-rate nature, diversified underlying collateral, and layered structural protections have historically supported income generation with limited interest rate sensitivity.” An analysis from VanEck also found that they’ve typically been able to weather market downturns better than high-yield and corporate bonds.
Goldman would not only be buying Palmer Square when its main product is in high demand, but also amid a private credit liquidity squeeze. It’s a move that would allow the bank to expand its credit and alts offering outside of traditional banking, and ramp up its competition with other alternative asset managers:
In March, Blackstone’s flagship private credit fund BCRED sold a roughly $450 million CLO deal. (That came after the company appointed a new head of CLOs at the end of last year.) The month before, Ares Management reportedly priced a second European CLO.
Also in March, Apollo secured a new credit line that Bloomberg said could bring funding to Apollo’s debt arm to originate or buy new loans; such financing can come just ahead of issuing a CLO. Its previous deal had been a roughly $700 million CLO issued around this time last year, the outlet reported.
Massive Market: Just how big is the market Goldman is eyeing? Another VanEck analysis said that the global CLO market hit $1 trillion in 2021 and is now roughly the size of the US high-yield bond market. Retail investors want in, too. There are more than $10 billion in CLO assets across ETFs, the report added.
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