DFG Investment Advisors has raised a $100 million fund that it will use to satisfy impending regulations enacted as part of the Dodd-Frank Act requiring CLO managers to have “skin in the game” of their deals.
Come Dec. 24, managers of collateralized loan obligations will be required to hold 5% of the economic risk of any new transactions. This is an onerous requirement for firms that manage money on behalf of others, but have little balance sheet assets of their own. Under the regs, a manager of a $400 million CLO would have to retain $20 million of the securities on its books.
Some CLO managers have chosen to sell themselves to better capitalized firms; others, like DFG, are looking at various ways to raise money.
“The CLO management landscape is undergoing a sea change,” said Volkan Kurtas, the company’s founder, in a statement. “Risk retention rules taking effect at the end of 2016 will accelerate this process. We believe the launch of our strategic fund is an important milestone that will allow us to thrive and grow in such a rapidly changing environment.”
The announcement comes just 10 days after the DFG completed its fourth transaction through arranger Goldman Sachs. DFG on June 10 issued Vibrant CLO IV, a $406 million portfolio of senior loans that is its first new-issue deal in over a year.
In January, the company sold a minority stake to Alberta Investment Management Corp., a Canadian institutional investment firm. The companies at that time did not state any risk-retention drivers behind that deal.
As of May 31, DFG had $2.5 billion of assets under management, including structured products like CLOs. Many of the concerns raised with risk-retention rules was the impact a 5% threshold would have on smaller managers lacking the capital to maintain stakes in the CLOs they operate.
One method for managers has been to raise funds for risk-retention compliance; DFG confirmed the new fund has the ability to provide capital for risk retention compliant CLOs, among other initiatives.
None of the CLOs that DFG has completed to date, including Vibrant CLO IV, comply with risk retention. However some other managers have been bringing new deals to market that comply in advance of the requirement. This is prompted by investor concerns that existing CLOs may lose their exemption status if and when the CLO is refinanced at a later date.
Regulators have indicated that the rule will not apply to CLOs issued prior to the enforcement date that are refinanced in 2017 and beyond, but the exemption will only apply to the original CLO issuer – and not to subsequent third-party purchasers of the assets.