Don Young, partner and co-founder of CBAM Partners, answers SCI's questions

Q: How and when did you become involved in the CLO market?

My partner Mike Damaso and I have been managing CLOs since 2001. I first became involved in the space when I joined Octagon Credit investors. After this, I went on to manage the Performing Credit business at Och-Ziff, which included US$7.5bn of CLOs. Mike has over 20 years of corporate credit management experience and first became involved in the CLO market when he worked at Guggenheim Investments, where he spent 13 years as a senior md, portfolio manager and chairman of the investment committee overseeing Guggenheim’s US$68bn corporate credit platform.

Mike and I had always talked about working together one day. Then in 2016 we decided to launch CBAM with our co-founder Jay Garrett. A year later, we had issued four CLOs through the CBAM platform totalling US$5.1bn of newly issued paper and we were named the largest CLO issuer of that year. Once we had the US CLO platform in place, we launched CBAM Europe in 2019, by hiring Jean Philippe Levilain from AXA. Jean Philippe has built a great team in Paris, and has issued three Euro CLOs. So, in total we’ve issued 17 CLOs across the United States and Europe and expanded our suite of investment strategies.

Q: How does the firm differentiate itself from its competitors?

There are a few ways we differentiate ourselves but it starts with creating an environment that allows our team to grow and capitalise on their strengths. Since we founded CBAM, Mike and I have continuously worked towards that by creating a collaborative, collegial, and inclusive space for our team of 46 professionals, over 60% of which are directly involved in the investment process. 

When it comes to investment performance, especially during times of volatility, we have the ability to actively trade and have delivered value to investors by doing so. Since 2017 we’ve traded an average of US$11bn of loans each year, and in 2020 we traded nearly US$13bn of loans. While loans were historically a buy and hold asset class, that has changed significantly. We believe that the best way to protect our investors is to constantly optimise the portfolios for risk.  Further evidence of this dynamic is the fact that CBAM was one of 31 CLO managers that did not have a tranche downgraded or put on watch during 2020. In the limited instances of defaults across the portfolio, we have been able to achieve strong recoveries. We expect our two largest defaults to have recoveries well above par. 

Another way we differentiate ourselves is by adapting our business to secular shifts in the markets. For example, the loan market has made a big shift toward private credit. In response we have expanded our credit solutions across broadly syndicated loans, private credit and credit underwriting to create a one-stop-shop for both sponsors and banks. By having a single relationship that can quickly and efficiently assist with any flavour of credit transaction, we’ve been able to expand our offerings. As an increasing percentage of deals flow to the private market with the prevalence of “hybrid” credit underwrites, sponsors and banks will favour those that have credit solutions across both the broadly syndicated and private markets.

Q: What are the firm’s key areas of focus today?

Although our heritage is in the CLO space, we’ve strategically expanded our product suite to include strategies where the firm’s credit research provides insights into other portions of the capital structure, including private credit, capital markets, opportunistic credit, structured credit and equity investing.

A pivotal step in the evolution of CBAM was when we hired Mike Manfred in late 2020 as head of capital markets. CBAM’s capital markets transactions now include direct lending, credit underwrites, bridge loans and other types of bespoke transactions that help our clients achieve their goals, and we’ve committed US$4.5bn in the capital markets space across 64 deals since inception.

As part of our strategic growth, we expanded our lending capabilities from the broadly syndicated market to private credit and direct lending. In private credit, we benefit from a flexible mandate, deploying capital across the capital structure without rigid yield or structural constraints. Our increased focus on managing direct relationships with private equity firms has also significantly bolstered the opportunities to act as a direct lender to their portfolio companies. We also have agency capabilities, which has enabled us to act as an agent and lead arranger in this space. We also now invest in CLO tranches of other managers, primarily in the mezzanine tranches for our opportunistic credit fund.

Five years since inception, we now have over US$15bn in AUM across multiple asset classes and geographies.

Q: What is your strategy going forward?

We’re always focusing on what’s best for our clients and are regularly looking for ways to adapt to the current market environment. We see considerable opportunity to build on our strong initial momentum in capital markets and private credit while also maintaining our position as one of the markets’ leading CLO managers and expanding our existing equity investing business, where we believe our expertise, insights and data can give us, and our clients, an advantage. In addition to our existing Long-Short Equity strategy, we added a SPAC strategy this year to give our investors access to this developing market where we find meaningful opportunities.

Q: Which challenges/opportunities do you anticipate in the future?

Even in bull markets, there are always individual industries and names that are misunderstood, and where there are opportunities to generate excess returns. Inflation and the associated margin compression will certainly be points of focus in the coming months and the best way to prepare for such headwinds is to seek out businesses with solid growth profiles, robust margins and the ability to pass through price increases. We are very focused on assessing our exposure to companies with high labour costs and significant fixed costs.

We’re also carefully monitoring the ongoing changes to the regulatory environment and the impending Libor transition to SOFR which will result in the benchmark for all leveraged loans and CLOs to change. Thanks to our team we’re well prepared to navigate this transition.

The convergence of the private and public markets will also create challenges and opportunities that we’re going to carefully consider. As more higher quality deals of increasing size are migrating to the private markets, our newly expanded suite of lending solutions across both public and private markets positions allows us to play a leading role in any debt transaction.

Mark Pelham