Nassau Re joins ranks of managers investing in 3rd party CLO equity

Global insurer Nassau Re is expanding its collateralized loan obligation business by launching an affiliate that invests in CLOs managed by other firms.

According to a company release, Nassau Private Credit (NPC) will primarily invest in equity, or controlling positions, in CLOs. The funds invested will come from both Nassau Re’s group of insurance, asset management, real estate investment and corporate credit affiliates and from institutional investors who invest alongside it.

It joins firms such as Neuberger Berman, Highland Capital Management and CIFC, all of which have launched investment vehicles in the last year focused on the equity and mezzanine debt of other U.S. and/or European managers. Last fall, the Canadian Pension Plan Investment Board announced it was investing $285 million in a vehicle to purchase the equity portions of new CLOs issued and managed by Sound Point Capital Management.

In addition, firms with longstanding CLO equity investments, like Pearl Diver Capital and Eagle Point Credit Co., have recently expanded their offerings to include funds specializing in mezzanine note purchases.

NPC plans to acquire most of its CLO equity in the primary market, when the deals are issued, though it will also “opportunistically” acquire securities in the secondary market, according to a spokesman. The firm will also consider buying into the lower-rated CLO debt notes that can be purchased at a discount to obtain “equity-like” returns, the spokesman said.

CLO equity represents the ownership stake in a CLO; holders are entitled to whatever is left after interest and principal earned on assets is used to make payments on other CLO securities. Because CLO equity is last in line to be repaid, it is the riskiest portion of a CLO and the most vulnerable to disruptions in deal payment flows or diversions of proceeds used to shore up a deal's performance weak spots.

But CLO equity has been among the most lucrative CLO positions for risk-tolerant investors in the post-crisis era, because corporate defaults have been low.

According to research from JPMorgan, CLO equity tranches delivered total returns of nearly 15% in 2018.

Nassau Re has recruited two CLO industry veterans as lead portfolio managers and managing directors at NPC: Bruce C. Brittain, who co-founded Morningside Credit Partners; and Russell C. Pemberton, recently head of CLO syndicate and origination at RBC Capital Markets.

According to the company release, the new CLO investment arm will work alongside the firm’s $1.2-billion asset Nassau Corporate Credit business, headed by chief investment officer Alex Jackson. Naussau Corporate Credit has issued two CLOs in both 2017 and 2018.

Nassau Re is launching NPC as the global CLO market has eclipsed the US$720 billion level in outstanding actively managed portfolios, which has also increased the universe for third-party CLO debt and equity investments.

In addition to the new third-party CLO business, Nassau Re plans to expand its commercial real estate whole-loan business and its alternative investments practice. The new plan will "accelerate the growth of our asset management segments, as we increase assets under management and broaden the Nassau Re franchise," Philip J. Gass, the insurance firm's chief executive, said in the release.

Nassau Re was formerly the Phoenix Cos., which was rebranded in 2015 after a capital commitment from Golden Gate Capital.