RBC BlueBay Asset Management is planning to launch its first interval fund to invest in the riskiest slices of corporate loan pools known as collateralized loan obligations (CLOs), according to portfolio manager Mark Shohet. The vehicle, a type of fund with scheduled exits, will mostly buy U.S. CLO equity, with future flexibility to invest in junior CLO debt, European CLOs and other structured credits.
Retail Investors Shift Away from Private Credit
The debut coincides with a retail retreat from business development companies (BDCs). Investors are fleeing these private lending funds over fears that artificial intelligence will disrupt software borrowers, which make up significant portions of BDC portfolios, alongside mounting anxiety over opaque valuations.
CLO Equity as an Alternative
CLO equity, meanwhile, can thrive on such turbulence. These vehicles use locked-in, long-term financing to snap up loans at steep discounts during selloffs, capturing outsized gains when prices recover. Shohet, who manages the new RBC BlueBay Enhanced Income Fund, stated: "If you have retail investors unhappy with private credit or unhappy with BDCs, this should look equally compelling — if not more compelling." CLO equity returns have neared 15 per cent in past years, he added.
Investors can withdraw at least five per cent of the fund's shares each quarter. Like other interval funds, the vehicle can allow for much greater redemptions, but the vast majority tend to stick close to the lower bound, especially when assets are relatively illiquid. Portfolio managers Ajeet Atwal and Sid Chhabra will run the vehicle alongside Shohet.
Market Context and Similar Moves
Other asset managers have made similar steps. VanEck launched its first interval fund to invest primarily in CLO equity and junior debt, as announced in a statement on Friday. The VanEck CLO Opportunities Fund will be sub-advised by PineBridge Investments. Shohet noted: "If a retail investor is accustomed to double digit yields, you'll probably be looking for something similar. There's not much right now in credit that's yielding those returns unless you're willing to take a lot more risk."
CLO equity has faced its own recent headwinds. Persistent spread compression over the past year has squeezed the arbitrage gap — the critical margin between loan income and bondholder payouts — eroding some returns for equity investors. Some CLO equity-tied funds, including ones from Eagle Point, Oxford Lane and Koch Inc.-backed Sound Point Meridian Capital Inc., cut their monthly shareholder distributions earlier this year.
JPMorgan Chase & Co. analysts noted on Friday that U.S. CLO equity cash-flow returns averaged 5.4 per cent in the first half of this year and could reach double-digits by the end of 2026. Some money managers have rushed to lock in cheap CLO funding costs, betting that market instability — caused by the ongoing closure of the Strait of Hormuz and resulting oil price spikes — may lead to wider loan spreads.
