While the CDO market continues galloping forward, growth is still constrained by challenges in placing the deal's pivotal preferred shares.

Fortunately for bankers, there are players such as AXA Investment Managers, a CDO equity investor for several years, which holds roughly forty CDO equity positions, for approximately $600 million notional.

Wall Street sources said AXAIM uses these volatile unrated positions as a risk management tool, and places the investments in various AXA funds. For instance, AXA could theoretically have a 95% weight in risk-free Treasuries and 5% CDO equity, allowing a fund significant upside gain, and putting in a 5% floor on potential losses, should the market turn sour.

AXAIM is said to be still contemplating CDO equity investments, though it picks and chooses its managers, and, in fact, will not buy an asset manager's first CDO offering. Paris-based AXAIM currently has more than EURO270 million in assets under management.

"While the U.S. may have many CDO equity investors, Europe has big buyers," said a London salesman. "I know of at least 15 accounts with over $200 million notional equivalent CDO equity holdings, and at least one account holding more than $1 billion."

The source added that the story that German insurance companies are buying most of the world's CDO equity is true.

According to one U.S. CDO analyst, "holding $100 million in CDO equity is big, $200 million is very big, anything over that I've never heard of."

Because investors like managers who have leveraged exposure to their deals, U.S. CDO issuers are generally considered some of the largest equity holders on this side of the Atlantic. But for a prolific issuer to build a $600 million equity position, they would have to issue approximately 40 high-yield CBOs, managing $12 billion in assets, assuming a $300 million issue size with 10% leverage, and the manager taking half of the equity.

Consider this: if an asset manager had 40 deals outstanding, and was collecting 50 basis points in management fees, that manager would be earning $60 million per annum.

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