The surge in collateralized debt obligations by first-time managers underscores a growing risk for personnel departures that could affect a deal's performance. The relatively low--and declining-- barriers to entry for the CDO business are providing increased encouragement for veteran CDO managers to form their own shops and investors should be conscious that in some firms, a handful of professionals are running the CDO business, panelists said.
The risk for a so-called key man departure, with Joyce DeLucca's departure from Katonah Capital to form Kingsland Capital serving as the most prominent recent example, is higher for deals managed by smaller buy-siders. Strong demand for CDOs means there is little if any tiering in deals from veteran managers and ones sold by newbies. As a result, investors would be wise to pick CDOs run by larger firms with established track records and deep benches, panelists said. "If I get hit by a bus crossing Park Avenue, there are other guys in the firm who can manage the funds I manage," said Andy Gordon, portfolio manager at Octagon Credit Investors, adding its deals are run more on a firm-wide strategy and culture than because of any one professional's views on the market.
Although new managers generally are not discounted by being forced to offer higher yields on the liabilities they sell, investors should require startups to have a certain amount of skin in the game, stressed Matt Natcharian, investment director at David L. Babson & Co. "You need to see a significant equity investment in a startup," he said. He took a swipe at new managers, which was not surprising given he's at an established manager, by adding the newcomers are sometimes unable to source assets as well as veteran firms can. Investors need to "make sure [new managers] are at the margin not buying riskier assets because they can't source collateral like experienced managers," he warned.