CLO platforms retain allure as M&As in alternative credit continue apace

The volume of mergers and acquisitions in the alternative credit manager space grew last year, as large institutions and established managers responded to investor appetite. But, while deals for standalone CLO platforms remain popular, direct lending and multi-strategy continue to be the key drivers behind the trend.

There were a record number of M&A deals in the alternative credit manager space in 2023, according to data from alternative credit consultancy Gapstow. The firm’s Alternative Credit Acquisition Database recorded 32 transactions accounting for a combined US$284bn in AuM, a 36% increase on the previous record witnessed in 2022, and a 78% uplift on the five-year average. A key driver behind this, says Gapstow ceo Chris Acito, is that investor demand for alternative credit products continues to grow, which is not the case for other asset classes.

“That’s where the money is,” says Acito. “CEOs of asset management firms are not that excited to acquire a large-cap public equity team that manages money in long-only format hugging the benchmark. You can say the same about hedge funds, fixed income, frankly even private equity. If you’re an asset manager and you’re looking for the next set of opportunities – specifically those that are growing – all roads point back to the alternative credit spaces.”

Increasingly, the type of buyer in recent years has shifted from private equity managers to larger institutions, according to Gapstow. There has been a notable change since around 2020, which has been exemplified over the past two years by deals including Franklin Templeton’s acquisition of Alcentra; Nuveen’s acquisition of Arcmont Asset Management; Mubadala’s acquisition of Fortress Investment Group; and Generali’s acquisition of Octagon Credit Investors and Global Evolution via its deal for Conning Holdings. 

In large part, this push from larger asset managers is because their LPs are looking to focus on fewer relationships with larger more diversified managers. As Acito explains: “My thesis is that there is going to be an imperative going forward for the big to become bigger and the broad to become broader.”

He continues: “There is always room for smaller boutique managers who do something interesting, but people want to do more with individual managers. LPs want to invest lots into alternative credit but they still need to have time to manage other areas of their portfolio, so increasingly it makes sense to work with the same people in multiple areas.”

The most popular strategies in this gold rush have been multi-strategy credit and direct lending, accounting for 52.2% and 22.1% respectively of AuM acquired in 2023, according to Gapstow’s figures. However, at 18.8%, CLOs made a larger contribution last year than has historically been the case. This was skewed somewhat by Generali’s acquisition of Octagon, which by itself accounted for the majority of CLO AuM changing hands. In terms of volume, the six acquisitions of CLO platforms was only marginally above the five-year average of 5.4.

CLO platforms, says Acito, have historically been attractive acquisition propositions, but there is a natural limit to the number of deals that can happen in the space. There are a small and dwindling number of free-standing CLO managers of scale, he explains, that have not already been acquired by larger asset managers.

“There are always a surprising number of deals for CLO platforms happening every year,” Acito says. “They will always be desirable because people view them as a scalable way to continue to raise AuM. But also, when an acquisition is made, the buyer doesn’t necessarily need to bring over any analysts if they already have a big CLO franchise. When you can take something over and can theoretically largely strip out all of the expenses, that’s a pretty accretive acquisition. You can’t often do that in other businesses, but it happens in CLOs all the time.”

This goes some way to explaining why five of the six buyouts of CLO managers recorded by Gapstow in 2023 were classified as consolidation or AuM plays. The value proposition for buyers that already have established CLO capabilities – and can consequently find efficiencies and synergies – is far greater than it is for those that do not.

“If I’m buying an existing book of business and taking out a lot of the costs,” says Acito, “eventually those CLOs are going to wind their way off, but in the meantime I get supercharged margin on them. The buyer who is keeping the CLO management team may not have as great a margin for a couple of years as it tries to build the platform.”

In stark contrast, acquisitions of direct lending managers have typically been capability-related – motivated by diversification into the asset class or into a new geography. In 2022, such deals included the acquisitions of Arcmont by Nuveen and Alcentra by Franklin Templeton. Last year, BlackRock acquired European manager Kreos Capital while Prudential Financial’s PGIM acquired lower mid-market direct lender Deerpath Capital Management.

When worlds collide
It is worth noting that all four multi-strategy acquisitions recorded by Gapstow were for firms that had CLO platforms: Fortress, Sculptor Capital Management, CQS and Angelo Gordon. Three were made by buyers that were already active in the CLO space, namely Mubadala, Rithm and TPG, calling into question what conflicts might be likely to emerge during the merger process.

Acito explains there can always be challenging situations, particularly when larger multi-strategy firms have a distressed team and a CLO team. A hypothetical scenario that sees a previously performing loan in an existing CLO platform become a potential target for the distressed strategy could essentially play “one side of the house against the other”.

“The industry has proven that, although it is not an inconsequential problem, that is a manageable problem,” Acito says. “In a merger situation, people would typically go into that with eyes wide open. With good help from compliance lawyers and the like, the appropriate protocols would be put into place.”

He adds: “Some people actually view that dynamic as complementary. In CLOs one of the highest added-value things you can do is to avoid bankruptcies. You limit that threat with a very diversified portfolio. But when loans do go bad, workout capabilities are a very different skill set, and sometimes it can be a real advantage to have an in-house group you can turn to for help.”

Kenny Wastell