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JULY/AUGUST 2018PRIVATEDEBTINVESTOR.COMCLO REPORTCHAINREACTIONSSponsors Churchill AssetManagement Monroe Capital Partners Group

We Invest in RelationshipsChurchill Asset Management is a leading provider ofsenior and unitranche debt financing to middle marketcompanies, primarily those owned by private equityinvestment firms. We currently manage over 4.4 billionExtensive Middle Marketin committed capital and are part of Nuveen, the assetRelationships and Accessmanagement division of TIAA and one of the largestglobal asset managers across multiple asset classes.Leveraging theScale and Scopeof NuveenAlignment ofInterestsand PrinciplesHighly ExperiencedManagement and TeamLong-term InvestmentPhilosophywww.churchillam.com / 430 Park Avenue 14th Floor. New York, NY 10022 / 212.478.9200

PRIVATE DEBT INVESTOR: CLO REPORTEDITORIAL COMMENTISSN 2051-8439Senior EditorAndy ThomsonTel: 44 207 566 5435andy.t@peimedia.comSpecial Projects EditorAndrew WoodmanTel: 44 203 862 7494andrew.woodman@peimedia.comAmericas EditorAndrew HedlundTel: 1 212 633 2906Andrew.h@peimedia.comNews EditorJohn BakieTel: 44 20 7566 5442john.b@peimedia.comReporterAdalla KimTel: 852 2153 3874adalla.k@peimedia.comJohnny MadridTel: 1 212-633-1455johnny.m@peimedia.comAdvertising ManagerBeth PiercyTel: 44 20 7566 5464beth.p@peimedia.comManaging Editor – ProductionMike SimlettTel: 44 20 7566 5457mike.s@peimedia.comHead of ProductionTian MullarkeyTel: 44 20 7566 5436tian.m@peimedia.comSubscriptionsIan Gallagher (Americas) 1 646 619 8131ian.g@peimedia.comAndre Rodrigues (EMEA) 44 (0)207 566 5425andre.r@peimedia.comSigi Fung (Asia-Pacific) 852 2153 3140sigi.f@peimedia.comFor subscription information visitwww.privatedebtinvestor.comDirector, Digital Product DevelopmentAmanda JanisTel: 44 207 566 4270Amanda.j@peimedia.comEditorial DirectorPhilip BorelTel: 44 207566 5434Philip.b@peimedia.comResearch and AnalyticsDan GunnerTel: 44 20 7566 5423Dan.g@peimedia.comPublishing DirectorPaul McLeanTel: 44 20 7566 5456paul.m@peimedia.comChief ExecutiveTim McLoughlintim.m@peimedia.comManaging Director – AmericasColm Gilmorecolm.g@peimedia.comManaging Director – AsiaChris Petersenchris.p@peimedia.comNEW YORK130 W 42nd Street, Suite 450,New York, NY 10036LONDON7th Floor, 100 Wood St, London EC2V 7ANHONG KONG19F On Hing Building, 1 On Hing Terrace,Central, Hong Kong PEI Media Ltd 2018No statement in this magazine is to be construed as arecommendation to buy or sell securities. Neither this publicationnor any part of it may be reproduced or transmitted in any form orby any means, electronic or mechanical, including photocopying,recording, or by any information storage or retrieval system,without the prior permission of the publisher. Whilst everyeffort has been made to ensure its accuracy, the publisher andcontributors accept no responsibility for the accuracy of thecontent in this magazine. Readers should also be aware thatexternal contributors may represent firms that may have aninterest in companies and/or their securities mentioned in theircontributions herein.Forging new bondsFor the inexperienced,investing in private debtcan be a daunting prospect.Whether taken as part ofa fixed income strategy, orviewed as part of traditionalprivate equity, the asset class– and the various degreesof risk it entails – can bedifficult to quantify. Thatsaid, the level of complexity depends on the kinds ofinvestments you make. Forprivate debt, it rarely getsmore esoteric than the collateralised loanobligation.CLOs – broadly defined as securitiesbacked by low-rated corporate loans whereinvestors buy tranches of varying risk – areoften misunderstood. The name itself arguably invites misinterpretation, thanks to thesimilar-sounding collateralised debt obligations – an umbrella term entailing a rangeof asset-backed securities (including themaligned mortgage-backed securities synonymous with the Global Financial Crisis).While CLOs are distinct from CDOs inseveral important aspects, the market stillsuffered from the fallout following the crisisas regulators cracked down indiscriminatelyand investors lost their appetite for exoticfinancial products.But now the CLO market is back. Fundraising has been strong for the past four yearsand a renewed peak in 2017 saw CLO-focusedfunds reaching a final close raise a combined 17.8 billion, according to PDI data. This wasdespite a long shadow cast over fundraising bythe prospect of CLO managers being subjectto risk retention rules under the Dodd-FrankAct (see p. 10). That threat went away afterthe US Court of Appeals ruled in favour ofthe Loan Syndicationsand Trading Association’sargument against “skin inthe game” requirements.So far in 2018, CLOfundraising has notreached the levels seen in2017. However, we did seeCBAM close its 1 billionCLO, while at the time ofgoing to press The CarlyleGroup announced the closure of Carlyle US CLO2018-1 at 611 million(the timing of the announcement means thefigure is not reflected in our fundraising dataon p. 12).The US market could yet reap more benefits from a benevolent regulatory environment, particularly in the mid-market (seep. 8). Meanwhile, incumbent European managers can take advantage of the fact the barrierto entry remains high on the continent (seep. 14). Investors, with a growing appetite fordiversified exposure to the US and Europeanloan markets, now recognise the value inproduct that can be tailored to their specificmandates – provided they can find a managerwith the right chemistry.Enjoy the report.Andrew WoodmanWHAT DO YOU THINK?HAVE YOUR SAYandrew.woodman@peimedia.comP D I CLO Report July/Aug 20181

PRIVATE DEBT INVESTOR: CLO REPORTCONTENTSANALYSISFEATUREDATA485CLO talking pointsCLO-focused vehicles account fora fraction of overall private debtactivity, yet they are growing insignificance10 Continental driftThe LSTA won a rare victory overthe US regulators in February, butwhat is good news for AmericanCLO managers is potentially badnews for European investors20 Industry perspectivesFrom changing investor appetitesto market cycles, we asked a panelof experts for their outlook on themajor CLO trends22 Access chargesThe EU is looking to insurers tohelp bring a 150 billion boostto the bloc’s securitisation marketbut CLOs are still facing swingeingcapital chargesNEWS6In the tranchesThe leading CLO news stories overthe past 12 months2PDI CLO Report July/Aug 2018Sizing up the middleCLOs offer attractive alternativesfor investors looking to gainexposure to mid-market debt.David Heilbrunn, Churchill AssetManagement’s head of productdevelopment and capitalraising, and Shai Vichness, thecompany’s chief financial officer,give us their insights14 Regional reflectionsDivergences in risk retentionand loan market size can meanmaking heads and tails of CLOson both sides of the Atlantic istough. Andrew Bellis, managingdirector in Partners Group’sEuropean private debt division,compares the two marketsGUESTCOMMENTARY16 Why CLOs cannot beignoredCLOs are a crucial considerationfor investors seeking diversified,uncorrelated returns. NeilServis, CEO of Serone CapitalManagement, offers his insightsReady to growThe relatively small fundraisingfigures for CLO-focused privatedebt funds belie a largeropportunity12 Structured realitiesPDI fundraising data showCLO-focused funds remain asmall yet dynamic niche withinthe broader private debt space18 TransatlanticcomparisonsData from Thomson Reutersreveal the extent to whichthe broader CLO market isconcentrated in North America19 Future appetitesA look at the funds currentlyin market shows that CLOstrategies are still a relativelyniche prospect for private debtmanagersCOMMENT24 Looking backThe soundbites that capturedthe CLO market over the last12 months, as reported by PDI

LEADER IN MIDDLE MARKET PRIVATE CREDITMonroe Capital LLC is a private credit asset management firm specializingin direct lending and opportunistic private credit investing. Since 2004,the firm has provided private credit solutions to borrowers in the U.S.and Canada. Monroe’s middle market lending platform provides seniorand junior debt financing to businesses, special situation borrowers, andprivate equity sponsors. Investment types include unitranche financings;cash flow, asset based and enterprise value based loans; and equityco-investments. Monroe is committed to being a value-added anduser-friendly partner to business owners, senior management, and privateequity and independent sponsors.CreditfluxManager Awards 20182018 BEST U.S. DIRECT LENDINGFUND of the YEARChicago 2017 SMALL MIDDLE MARKETSLENDER of the YEAR, AMERICASAtlanta Boston 2017 LOWER MID-MARKETLENDER of the YEAR, AMERICASDallas Los Angeles2016 LENDER FIRMof the YEAR New York2015 SMALL BUSINESS INVESTMENTCOMPANY of the YEAR San FranciscoTo learn more about Monroe Capital, visit monroecap.com 2018 Monroe Capital LLC

ANALYSISOVERVIEWCLO talking pointsCLO-focused vehicles account for a fraction of overall private debt activity, yet they aregrowing in significance. Andrew Woodman examines the major themes of the reportUS funds face fewer regulationsFebruary was a good month for the CLOindustry. After a long period of uncertainty,the US Court of Appeals ruled that CLO fundswould be exempt from complying with DoddFrank Act risk-retention rules. The deadlinefor regulators to appeal that decision hasalready passed. How much fuel this will addto an already heated market is unclear. Fearsthat regulators could force CLO managers toretain risk capital on all securities issued havedone little to dampen appetite thus far. As ouranalysis on p. 10 reveals, 2017 was a recordyear for CLOs in the US – with 117 billion innew issuance, according to Thomson ReutersLPC – and there is good reason to believe that2018 will be no different.Europe still on a leashWhile US-managers have been unshackledfrom a regulation covering risk retention,equivalent rules in Europe remain in place.On the face of it, European CLO funds facea greater administrative and financial burdenas teams work to comply with regulations.The flip side is that it has created a higherbarrier for entry to the European market, adistinct advantage for incumbents. However,European investors may find it more difficultto gain exposure to the US CLO market assmaller, Stateside managers forgo Europeaninvestment to avoid having to comply withEU rules.Competition is getting more aggressiveAs CLO activity ramps up more playerswill be vying for fewer deals. According toindustry professionals, another headwindfacing the CLO market, is loan supply.The most selective managers are also looking to avoid aggressive terms, as strongdemand from investors shifts pricingin favour of borrowers. The market willfavour managers who can generate returnsthrough active management and can differentiate themselves with strong risk controls,credit selection and an ability to provideaccess to new collateral through marketrelationships.CLOs are gaining traction with a wider group of LPsThe CLO market is finding broader appealamong a growing community of institutionalinvestors and asset owners. The asset classis also attractive to a wide range of investortypes – including banks, insurance groups,asset managers, private equity houses andasset managers – looking for floating rateassets in a rising rate environment. Investors4PDI CLO Report July/Aug 2018increasingly find they are better placed tomeet their mandate objectives by havingaccess to a tranched structure with a rangeof risk profiles. Asian LPs, which had previously withdrawn from the market in thewake of the global financial crisis, have nowrekindled their interest in CLOs by takingsenior portions of capital structures.