PIMCO has developed an additional alternative investment strategy, the collateralised debt obligation (CDO), and expects to have a commitment of $200 million in institutional capital by the launch date of March 31, 2007.
Using subordinated corporate debt, and a structure designed to provide investment security and stable returns, the fund has already attracted around $120 million, and PIMCO executive vice president John Wilson is confident it will top $200 million.
The challenge with CDOs lies in identifying those assets within the portfolio that are likely to default, and making sure everything in that portfolio is “money good”.
“What you’ve got to do as the manager is make sure it’s generating enough, at a minimum, to pay all those people, and anything that’s left goes to the equity-holders,” Wilson said.
He pointed out there are currently no other CDO products available to the Australian institutional market, though there are some within the retail sector.
Having started the secondary market for CDO equity in 2003, Wilson said PIMCO was in an enviable position, with a strong comparative advantage in the primary market.
He also felt PIMCO’s expertise in the fixed interest arena meant it was particularly well placed to introduce the product.
“PIMCO’s advantage is its specialisation within fixed income [in deciding] on the merits of underlying investments,” Wilson said.
It is expected that institutional investors such as superannuation funds could use a CDO as a complement to their portfolios, using it as a diversifier within existing alternative investment allocations.
“If you’re going to be interested in this strategy, you’re going to be a large superannuation fund that has some allocation to alternative investments,” said Wilson.
“The beauty of this in the alternative bucket is that it does pay out almost immediately, rather than having to wait for the J curve of returns [with private equity].”
While the initial primary target of CDOs is the institutional space, he said PIMCO intends to launch a retail version of the product later on, in partnership with a key retail player that is yet to be decided.
“We are targeting this fund at the institutional market in the first instance, but there’s a very clear plan to take it to the retail space later. That would be our intention down the track,” Wilson said.
