Last week’s announcement that KKR will acquire Avoca sent a strong signal of support for the European loan asset class, and comes on the back of a year that has seen healthy interest in the loan market from investors around the globe.
The move also marks a further development in the CLO manager consolidation trade, as previously consolidation was driven by the need to boost assets under management – a trend that has tapered off as increasing numbers of CLO 1.0s amortise. Going forward, some predict the need to secure financial resources, or a well-capitalised parent to finance risk retention, could instead spur consolidation.
That Avoca has finally been acquired is no great surprise to the market. During the most active period of consolidation the independent European credit management firm was touted as a potential target. But the arrival of KKR as a suitor is seen as a very good fit by market players, given the private equity sponsor’s existing exposure to the European credit markets is via its KKR Asset Management arm, which invests in more alternative credit strategies (private credit and special situations), while KKR Capital Markets provides tailored capital markets advice, as well as arranging debt and equity financing for transactions.
Investing across five strategies — European loans and bonds, credit opportunities, long/short credit, convertible bonds, and structured and illiquid credit – Avoca’s platform should complement and expand rather than overlap KKR’s existing European capabilities. It also provides KKR, a large player in the U.S. loan markets, with broader access to the European loan market.
It would also provide Avoca with a well-capitalised parent to help support future CLO issuance, should the manager want to build out a CLO 2.0 platform in Europe. Avoca brings with it 10 existing CLOs – the Avoca CLO range from CLO II through CLO IX, as well as Lombard Street CLO I and ACA Euro CLO I – and was understood to be on the verge of pricing its first European CLO 2.0, but a final print may take longer than expected due to the acquisition.
Meanwhile, KKR Financial Advisors II priced one CLO this year in the U.S. (KKR Financial CLO 2013-1) via Citi.
While other private equity sponsors, including Bain, Blackstone, and Carlyle, branched out into the European market years ago, KKR’s decision to embrace the market now is interesting. Appetite for European loans has increased in recent years, and as sovereign risk and macroeconomic concerns have diminished, new investors have entered the market. The opportunity to fill the space left as banks deleverage is often cited as part of the investment decision, although players have mixed views as to how big an opportunity this actually represents.
KKR is not the only U.S. firm keen to tap into European opportunities, sources say, and while no one is predicting the influx of U.S. firms that took place in 2005-2007, there is talk that other asset managers are exploring the possibility of building out platforms here, including CLO businesses.
According to LCD, CLO managers’ share of the primary market dropped to 23.2% for LTM 9/13, from 28.6% last year. They now represent 49% of the market (YTD 9/13), versus 59% last year, while credit funds have seen their share increase to 36% (YTD 9/13), from 25% last year.
As the numbers above show, managers have already started to branch out from CLOs to new types of investment vehicles, such as credit funds, managed accounts, and listed funds. The number of active loan investment vehicles has increased this year to 367 (LTM 9/13) from 352 last year, while the number of manager groups has increased to 94 from 86. – Sarah Husband
(An updated table, listing the CLO acquisitions that have taken place in Europe, is available to LCD subscribers for download, please click here.)