New Abu Dhabi-backed Fund To Target Leveraged Loans

Private equity legend meets loan veteran meets Middle Eastern sovereign wealth fund. The result: a business targeting some of Wall Street’s hottest plays in riskier debt.

Thomas H. Lee of Lee Equity Partners and Peter Gleysteen, founder of CIFC, have started a venture to issue collateralised loan obligations, which bundle corporate loans into bonds for sale to investors. AGL Credit Management also will run a separate leveraged-loan strategy and has backing from an Abu Dhabi Investment Authority subsidiary and a US state pension, which invested a combined $650 million.

The business, which aims to gather $4 billion to $5 billion of assets within its first years of operation, is a reflection of how significant the market for leveraged loans and CLOs has become. Lee and Gleysteen sit atop decades-long Wall Street careers and are throwing their weight behind the assets, which have been selling at a record pace.

The growth has attracted scrutiny from regulators, who ask if the fervour is a threat after one type of structured product blew up a decade ago.

“We think there is a big need in the market, especially among the larger players,” said Lee, 74, who founded one of the first private equity firms, Thomas H. Lee Partners, in 1974.

The ADIA subsidiary invested $500 million in the businesses, while $150 million came from a US state pension fund the founders didn’t identify. Lee’s family office also invested. AGL will use about $450 million for the leveraged-loan strategy, with the balance to kick off the CLO sales platform.

With the loan strategy, AGL plans to use leverage to bolster gains from debt that it will select and manage. The CLO platform may issue three or four deals within the first year as the firm builds out a team of a dozen or more people.

CLO issuance has soared since the 2008 financial crisis when the funds emerged unscathed, especially compared with deals backed by mortgages. Sales of CLOs hit a record $130 billion last year.

Yield hunt

Gleysteen, 67, will be AGL’s chief executive officer and chief investment officer. His own loan credentials stretch back decades, having set up CIFC in 2005, which became one of the largest CLO managers before being sold in 2016 for $333 million. He earlier worked at JPMorgan Chase & Co. with Jimmy Lee, who was instrumental in creating the leveraged-finance market.

“At CIFC’s inception we closed $3 billion of CLOs in just over a year,” Gleysteen said. “If markets are receptive, I don’t see why we can’t do that again.”

Gleysteen and Lee said they said they expect the leveraged-loan strategy to generate returns of about 8 percent to 10 percent going forward -- the type of results pension funds and insurers seek to match their long-term liabilities. Leveraged loans have returned about 4.3 percent this year, according to the S&P/LSTA Leveraged Loan Index.

An increasing number of money managers are developing CLO businesses, including hedge fund Elliott Management Corp. and Greg Lippmann’s LibreMax Capital. The pool of investors has also widened, with family offices and sovereign wealth funds increasingly acting as buyers.

Heightened scrutiny

“When Peter approached me on the idea, I was intrigued,” Lee said in an interview, adding the two men worked together on private equity deals since the 1980s. Lee earlier helped set up a middle-market lending business, MidCap Financial, and a publicly traded business-development corporation.

Leveraged loans and CLOs have received heightened scrutiny from regulators in recent months. Concerns include loosening lender protections in loan documents and how highly levered companies would weather a downturn.

For Gleysteen, the question isn’t about whether the assets themselves are solid products, but which investors they’re best suited for. Buyers should be long-term investors who can hold them through a cycle, he said.

“An investor crossing the ocean should be on an all-weather ship with a seasoned captain and crew who are prepared for the unexpected,” he said.