RBC BlueBay Is Launching a Public Debt Fund as Retail Investors Flee Private Credit

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(Bloomberg) — As retail investors pull cash from private credit, Royal Bank of Canada’s asset management division is offering a risky, public market alternative: a fund for CLO equity.

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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, according to portfolio manager Mark Shohet. The vehicle — a type of fund with scheduled exits — will mostly buy US CLO equity, with future flexibility to invest in junior CLO debt, European CLOs and other structured credits.

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The debut coincides with a retail retreat from business development companies. Investors are fleeing these private lending funds over fears that AI will disrupt software borrowers — which make up chunks of BDC portfolios — alongside mounting anxiety over opaque valuations.

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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.

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“If you have retail investors unhappy with private credit or unhappy with BDCs, this should look equally compelling — if not more compelling,” said Shohet, who manages the new RBC BlueBay Enhanced Income Fund. CLO equity returns have neared 15% in past years, he added. 

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Investors can withdraw at least 5% 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.

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Portfolio managers Ajeet Atwal and Sid Chhabra will run the vehicle alongside Shohet. 

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Others have made similar steps. Asset manager VanEck launched its first interval fund to invest primarily in CLO equity and junior debt, it said in a statement Friday. The VanEck CLO Opportunities Fund will be sub-advised by PineBridge Investments.

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“If a retail investor is accustomed to double digit yields, you’ll probably be looking for something similar,” Shohet said. “There’s not much right now in credit that’s yielding those returns unless you’re willing to take a lot more risk.”

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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.

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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.

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JPMorgan Chase & Co. analysts noted Friday said that US CLO equity cash-flow returns averaged 5.4% in the first half of this year, and could reach double-digits by the end of 2026. 

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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.

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