Prudential Investment Management has set up a manager replacement business, through which it is seeking to take over collateralized debt obligations from managers that are underperforming. The business appears to be the only one of its kind, according to CDO professionals, who noted most experienced managers want to take over deals to bulk up their assets under management but no other managers appear to have set up a business line dedicated to servicing underperforming CDOs. Timothy Aker, managing director and head of the CDO platform at Prudential, said on a panel that the firm has to date taken over nine CDOs. "It's a full line of business for us; we offer investors not just [our] new issuance, but an alternative [as a replacement manager]," he said. He said the investment manager sees the business line as a way to broaden its own platform and, of course, as a profitable venture.
"It's an easy way to grow assets under management, without having to do all the structuring," said one rating agency official. He noted the wordings of new deals are increasingly affording investors greater flexibility in replacing managers.
On its face, taking over a distressed CDO would not appear to be a profitable venture, since CDO management fees are based on the performance of each class, meaning that a distressed CDO would be generating scant fees. To make the business line a profitable one, Aker said Prudential typically will renegotiate a higher management fee before taking over a distressed portfolio.