A new joint venture between business development companies (BDCs) affiliated with Carlyle and Sixth Street aims to capitalize on the market for collateralized loan obligations (CLOs), offering a structure designed to mitigate risk during periods of market volatility. , Carlyle Secured Lending and Sixth Street formally launched Structured Credit Partners JV (SCP), with an initial $600 million in equity commitments.
The partnership, as detailed in a company release, will focus on investing in broadly syndicated first lien senior secured loans. Carlyle Secured Lending will contribute 25% of the initial capital. The venture’s structure is notable for its emphasis on stability, utilizing long-term, predominantly investment-grade rated CLO debt to finance its portfolio. A key feature is the use of non-mark-to-market financing, intended to prevent forced asset sales during temporary market downturns, provided credit fundamentals remain sound.
This approach addresses a common concern in the CLO market: the potential for “fire sales” triggered by mark-to-market accounting rules. When loan prices decline, CLOs that are required to mark their portfolios to market may be forced to liquidate assets to meet collateral coverage tests, exacerbating downward pressure on prices. By utilizing non-mark-to-market debt, SCP aims to avoid this cycle, allowing it to ride out short-term volatility and focus on the long-term credit quality of its investments.
The combined asset management expertise of Carlyle and Sixth Street is substantial. The two firms collectively manage more than $60 billion in CLO assets across 130 vehicles, providing SCP with significant scale and resources. This scale is expected to enhance returns through fee efficiencies and access to a wider range of investment opportunities.
Perhaps the most distinctive aspect of SCP is its fee structure. Unlike traditional CLO structures, the joint venture will not charge management or incentive fees at the JV level or on the underlying CLOs. This fee-efficient model is designed to maximize the yield that flows through to BDC shareholders, after accounting for debt service. This structure signals a commitment to aligning the interests of the venture’s managers with those of its investors.
Governance of SCP is structured as a 50/50 partnership, with material decisions requiring unanimous approval from both Carlyle and Sixth Street. Management of the underlying CLOs will be split roughly equally between the two firms, leveraging the strengths of each platform’s credit teams. This shared governance model reflects the collaborative nature of the venture and the importance of both firms’ expertise.
The formation of SCP comes as the CLO market continues to evolve. Collateralized loan obligations are complex financial instruments that repackage pools of corporate loans into different tranches with varying levels of risk and return. They play a significant role in providing financing to leveraged companies, and their performance is closely watched by investors as an indicator of credit market health.
The demand for CLOs has fluctuated in recent years, influenced by factors such as interest rate movements, economic growth expectations, and investor risk appetite. The non-mark-to-market structure of SCP could prove particularly attractive to investors seeking stability and predictability in a potentially volatile environment. The venture’s focus on senior secured loans, which have a higher priority in the event of default, further enhances its risk profile.
The Bloomberg report, published , highlighted the increasing trend of BDCs teaming up to issue CLOs, suggesting a broader industry recognition of the benefits of scale and specialized expertise in this market segment. The joint venture is expected to issue CLOs in a format that offers extra protections, though specific details regarding these protections were not immediately available.
The $600 million initial equity commitment represents a significant investment, but it is relatively small compared to the overall size of the CLO market. However, the venture’s innovative fee structure and risk management approach could position it for success and potentially attract further capital in the future. The success of SCP will likely be judged by its ability to generate attractive risk-adjusted returns for its shareholders while navigating the complexities of the credit market.
Analysts will be closely watching how SCP’s non-mark-to-market financing performs in various market scenarios. While designed to mitigate downside risk, it could also limit upside potential if loan prices rise significantly. The venture’s governance structure, requiring unanimous approval for key decisions, could also present challenges if Carlyle and Sixth Street have differing views on investment strategy or risk management.
