Gordon Neilly, executive chairman at WhiteStar Asset Management, answers SCI's questions

Q: Gordon, what are your expectations for WhiteStar as it expands further into the European CLO space?

A: So, this is our entry point into the European CLO space. If you look at the industry today, not only is the European CLO market far less developed than the US CLO market, it’s also quite fragmented with about 50 players in the European market compared to just over 100 in the US market. But in terms of funds under management, the US market is four times the size of Europe.

A number of European investors are also investors in WhiteStar US CLOs, but we are not a brand name in the European market and it’s going to take us a little bit of time to build up the same profile and presence as WhiteStar has in the US. But, we will do it, because we have a very strong pedigree, and part of our role here will not only be to deliver to the underlying investors but also to try to cultivate new investors in the CLO space. I think there’s a lot of scope for that.

Q: In terms of the transfer process of the Mackay Shields Europe CLO 1 and 2 deals, what’s the next stage?

A: Consent from our investors will need to be received and we are concluding that process now. We are hopeful we will be able to do that before the end of this 2021 calendar year.

Q: And will the two Mackay Shields CLOs stay under their current branding?

A: The two CLOs in Mackay Shields will remain under their current branding for the time being, but any new CLOs that are issued by WhiteStar as a group will be issued under the Trinitas brand, consistent with our US business.

Q: WhiteStar has been noted to have a conservative approach to CLO management. Are there any other ways you feel your approach differentiates to others in the European market?

A: I think there are a lot of very good players in this market, but at WhiteStar we think we are different in a number of respects. First, WhiteStar has a very fundamental approach to credit, and we have a rule that no analyst is allowed to cover more than 30 credits. That means they are able to get to know the credit inside out. It’s a very disciplined process which has resulted in our default ratio standing up very well to the overall market, so I think that is a strength.

Our second strength is that we pay a lot of attention to the liquidity of the underlying investments, because mistakes do take place from time to time, and we need to make sure that if we see anything happen then we can actually exit investments. The metric that is often used in these situations - the weighted average rating factor (WARF) - will typically find WhiteStar and indeed the Mackay Shields CLOs having on average a higher rating in the market. So, I think it comes back to a fundamental approach, attention to liquidity and ensuring we are thinking about returns on a proper risk adjusted basis.

Q: What are your hopes for the new business in 2022?

A: We have opened the first Trinitas warehouse now and are in the process of opening the second. In 2022, we hope to issue two CLOs, and we are aiming to be doing that at the very least every year. There are a number of plans that we have in mind, but we would expect to end the year with - in addition to the CLOs that come with the business - another two CLOs in place.

We also believe there is strong appetite for a credit opportunities fund, so we will be looking to launch that too but I would think that would be more likely to be in the second half of the year. We are going to make sure that any move we make we make at the right pace and one that will be driven by investor appetite.

Q: Are there any other areas of alternative credit that are potentially of interest in developing with the new European business?

A: I think the message we are getting is that we’ll want to be making sure we are relevant to big institutional investors who are looking for multiple capabilities from the managers they are working with. They have to do due diligence on the managers, so it is more compelling if they can access multiple high-quality capabilities from that work. We are looking at a range of capabilities to potentially bring in – including direct lending and infrastructure lending, and there are others under consideration.

I don’t want to be definitive on this though because one thing that I am absolutely certain of is that we are not going to bring in any team where we don’t think there is cultural alignment with us or a shared investment ethos. This is what we have achieved in recruiting the CLO team. This was the process we went through when we were looking to bring in the team; we didn’t just pick up the phone to Mackay Shields. I had well over 100 meetings, and I spoke to a lot of different investors, advisers, individuals, and teams as well as looking at potential corporate acquisitions. I came across some really good businesses that were just not available and others that didn’t quite fit with what we were looking for.

The important thing for me was to identify a team that would be a good fit for WhiteStar, because, ultimately, what we are looking to do is to build a global capability. So, we wanted talented individuals who share the same investment ethos, the same investment approach, and are culturally aligned with the WhiteStar team in Dallas. That took time to achieve, but as soon as we lighted on Brian McNamara and Conor Power, we knew we had found a team which matched our aspirations.

Q: How do you expect ESG considerations and EU regulations will fit in with your future plans for the business?

A: I think ESG is now becoming a pre-requisite in the industry. I’m not sure if it’s a differentiator anymore. But what I think you’ve got to do within that is really identify what you stand for, and our new team is quite advanced on this. They have a lot of detailed polices in place and so ESG will certainly serve as a core part of any offering.

Q: How do you see WhiteStar’s role in the future of the European CLO market?

A: Hopefully what WhiteStar can become is a leading player in the European CLO market, which, as I said, is very fragmented. We would consider ourselves to be a very experienced player, with a very clear investment approach and a strong track record. Fundamental to our modus operandus is to ensure we deliver strong risk adjusted returns for those who entrust their funds to us.

I think, in many ways, the European CLO market has potentially been starved of equity capital and WhiteStar has always been able to deliver that. We have our own risk retention vehicle in place and that has been able to provide a substantial position in the equity of all the CLOs originated, and that will be the same case here in Europe. This brings strong alignment with investors across the tranches.

But at the end of the day, what we want to demonstrate is that we do a really good job for the investors, so our fundamental investment approach is a key strength. I think we are moving into what I would call a ‘stock-pickers market’ in 2022. I think our process will play very strongly into that. It is our hope that WhiteStar Europe can become a significant player in the European market and we will seek to emulate what WhiteStar has achieved in the US.

Q: How did you come to decide on buying over building in the current CLO market?

A: We didn’t go out with the intention to buy. We were seeking to identify a team that we felt to help us achieve our aspirations to build a strong presence in the European CLO market. And when we found the team, we felt it would be worthwhile exploring with their existing employers whether there could be an opportunity to find a way forward that could suit both parties.  After much discussion we clearly arrived at a solution which suited both WhiteStar and MacKay Shields.

But we started with finding a team that we felt fitted our culture and shared our investment ethos. We were prepared to hire them and start a brownfield site. It was always going to be beneficial to launch our European initiative with an existing business that was managed by the team of our choice. We are delighted that Brian and Conor will be joined by colleagues who were an important part of the success they achieved at MacKay Shields - with the entire team joining us at WhiteStar Europe.

Claudia Lewis