Some of the world’s wealthiest clans have been throwing their money into an esoteric piece of financial engineering that has Wall Street in its thrall.
They’re called collateralized loan obligations, and they transform riskier company loans into bonds of varying risk and reward. Buyers have included affiliates of the Pritzker family, Bill and Melinda Gates, and the family office of Seattle Seahawks owner Paul Allen, who co-founded Microsoft Corp. with Gates. The Huizenga family behind the Waste Management Inc. empire as well as Iconiq Capital LLC, which invests on behalf of wealthy clients including Facebook Inc. co-founder Mark Zuckerberg, have both had CLO exposure in their portfolios at some point. The Anschutz family, led by Los Angeles Lakers co-owner Philip Anschutz, is another player.
The presence of the hyperrich in deals underscores the widening demand for CLOs, a three-letter acronym that’s inspired fear and fervor in the debt markets this year. Proponents point to the CLOs’ potential for double-digit returns, resilience to rising interest rates, and low defaults through last decade’s financial crisis. Others such as KKR & Co.’s Jamie Weinstein, however, have raised questions about whether the frenetic pace of sales is spurring reckless behavior just as the prospect of an economic downturn looms over an increasingly leveraged corporate America.