CLOs: The secret source of returns for clever investors in Switzerland!

CLOs: The secret source of returns for clever investors in Switzerland!

In the BX Morning Call, Daniel Riediker, CEO and co-founder of Alegra Capital, talked about the complex world of structured loans, especially collateralized loan obligations (CLOs). These investment instruments are exciting, but sometimes poorly understood. Since its founding in 2003, Alegra Capital has specialized in CLOs and is one of the leading companies in this area. Riediker emphasized the impressive performance and clear strategy that CLOs offer.

The challenges that arose during the financial crisis and the Covid pandemic were also discussed. Despite these setbacks, Alegra Capital's funds have been among the best-performing alternatives in the fixed income sector for years. In particular, the Alegra ABS I fund, which celebrates its 20th anniversary at the end of July 2024, has achieved an average return of over 9.4% per year, reflecting its robust management.

Risks and successes of CLOs

Although CLOs were viewed as problematic during the financial crisis, they differ significantly from the securitizations criticized at the time. The Alegra ABS I fund invests exclusively in transparent instruments where the underlying loans are known. The fund suffered setbacks during the crisis, but recovered to new highs within two years.

Over the past 25 years, CLOs in Europe have had lower default rates than other areas of the fixed income market, according to S&P and other ratings agencies. The underlying loans, which typically have sub-investment grade ratings, still offer better collateral than many high-yield bonds. Private equity firms that own the borrowers also provide additional protection to avoid defaults.

Market development and returns

The market for CLOs is relatively small and specialized, with around 300 billion euros in Europe and around 1,000 billion US dollars in the USA. Despite declining investment grade yields, which have fallen from over 9.5% to around 6.5%, the Alegra ABS I fund shows excellent performance and continues to offer high cash flows of 25% to over 30% per year on CLO equity positions.

The fund's redemption period is 90 days to the end of the month and the fund was open at all times throughout the financial crisis. This is a testament to the stability and trust that investors place in this investment instrument. The fund's partners and board of directors have also invested substantial capital in their own products, which further strengthens confidence in the long-term viability of this strategy.

With the support and expertise of Alegra Capital, CLOs appear to continue to grow as promising investment opportunities and compete successfully in a specialized market. Finance.ch reports on these developments while VP Bank The positive trends and the underlying assets of the CLOs are examined in detail.