"The Pulse"--#52 / CLOs

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Recruiting Timeline:

Banking:

Where We’re At:  

• SA 2025: VRA Partners opened its application this week. So far ~109 banks have opened applications. Please reach out if you’re looking for mock interviews or any coaching!

• FT 2025: VRA Partners, Clearsight Advisors, and GLC Advisors opened their application this week. There are currently 9 firms recruiting for FT 2025.

New SA 2025 Applications:

• VRA Partners: Atlanta-based boutique (SA 2025)

New FT 2025 Applications:

• VRA Partners: Atlanta-based boutique (FT 2025)

• Clearsight Advisors: DC-based boutique (FT 2025)

• GLC Advisors: Strong Rx boutique (FT 2025)

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Consulting:

Where We’re At:

• SA 2025: 13 SA 2025 applications have been released so far. Apply as quickly as you can (as long as your application is the best it can be). Case studies are an important component of the interview process–it is beneficial to practice with a study buddy to verbalize your thinking!

SA 2025 released apps:

• KPMG: Advisory Intern, Deal Advisory - Financial Due Diligence (SA 2025)

• PWC: Business Processes Intern (SA 2025 - Closed).

• Curtis & Co: Boutique firm (SA 2025 - Closed)

• Protiviti: Tech Consulting (SA 2025 - Closed)

• RSM: Tech, Risk, and Business Improvement Intern (SA 2025 - Closed)

• Deloitte: Business Technology Solutions Summer Scholar (SA 2025 - Closed)

• Berkeley Research Group: Associate Consultant Intern (SA 2025)

• Oliver Wyman: Summer 2025 Intern (SA 2025)-Closed

• Bain: Associate Consultant Intern (SA 2025)

• Cavi Consulting: Consulting Associate Internship (SA 2025)

• McKinsey: Summer Business Analyst (SA 2025)

• BCG: Associate Consultant Intern (SA 2025)

• Redstone Strategy Group: Consulting Intern (SA 2025)

Apply ASAP if you’re interested!

Buyside:

Where We’re At:

SA 2025: No new updates. So far ~93 buyside shops have opened applications. SA 2025 recruiting is winding down and we expect limited volume going forward.

However, we have an exciting new release planned for PE associate recruiting—stay tuned!

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Market Update:

Collateralized Loan Obligations

Remember the part of the Big Short where Selena Gomez was yapping in the casino about something technical? Well, CLOs were that technical topic and IMO, the Big Short did a shitty job at explaining what these are and why they exist.

The CLO market is gigantic. Nearly $1tn worth of capital has been plowed into these instruments. With rates high, this will continue to grow as credit is yielding very attractive returns. Collectively, CLOs represent about 2/3rds of leveraged loan investors.

And yes, they were partially responsible for the GFC, but we will dive more into that later.

We previously touched upon CLOs here: "The Pulse"--#17

In a very brief manner, we are going to answer: What is a CLO? What is a CLO made of? Who invests in CLOs? Why would someone invest in CLOs? Who works in CLOs?

A CLO is a collateralized loan obligation. It is an entity with the sole purpose of managing a pool of corporate loans. These loans are directly ‘purchased’ in a traditional leveraged finance syndicate or they are purchased in the secondary markets.

-What type of corporate loans?

Typically term loan Bs provided to non-investment grade borrowers. So, your standard leveraged loan.

-What do these corporate loans do (investor perspective)? 

They produce income. To be more specific, the borrowers of these loans pay interest to the respective lenders.

-Who invests in CLOs? 

Pension funds, insurance companies, asset managers, banks, sometimes other CLOs (compounded leverage)!

CLOs provide income via interest to investors. They also provide enormous diversification benefits since a typical CLO will manage 150-200 different loans. A pension fund could directly purchase a bunch of loans on its own and benefit from diversification, but this would require deep underwriting and analysis. A pension fund’s primary goal is to not lose any money, so diversification is incredibly important which makes them more likely to buy into multiple CLOs instead of directly purchasing their own group of corporate loans.

-Who works in CLOs? 

Primarily credit hedge funds and random guys in Connecticut + New Jersey

Ok, now to the juicy stuff. Let’s talk CLO mechanics and take a deeper dive into why these vehicles are so prevalent (ie: how can these make a ton of money).

As mentioned, CLOs buy a bunch of loans and bundle them together. However, investors in CLOs don’t just buy a share of the CLO and call it a day. Instead, they buy tranches of the CLO!

Tranches are rated from safest (AAA) to riskiest (B in this demonstration, but could go all the way to CCC). The AAA tranche is the last tranche to face losses if the loans start to default. Due to the additional protection, this tranche is compensated with a lower yield.

For example, a CLO may buy $500mm of loans with a weighted average interest rate of S + 400bps and then tranche out $480mm of these loans for a weighted average interest rate of S + 300bps. The AAA guys might receive $100mm for S + 80bps, the AA may receive $50mm for S + 100bps, etc. The goal here is to make sure your weighted average interest of the tranches at least matches the weighted average interest of the assets. Shit hits the fan when the weighted average interest of the tranches is greater than the weighted average interest of the assets.

Ok, so how about the CLO equity? This is where the CLO manager sits in the capital structure (the guys who work in CLOs). The equity guys are rarely guaranteed a stream of income. However, from our example above, there is S+ 400bps on the assets and only S + 300bps on the tranched debt which leaves S+ 100bps to the equity.

Now, from the example above this may seem like a shitty deal. Who would want the first loss piece and only receive S + 100bps vs. the AAA receiving S + 80bps and a ton of protection? Simply said, it is much more complex than that.

You see, as with any equity investment, your return is predicated on the price you pay. In the CLO world, a manager may use the $480mm of tranched debt + ~$10mm of their own money to buy $500mm of loans. Effectively, they buy these loans at a discount. Therefore, in a scenario where no loans default, the equityholders can claim a return of $10mm + the S + 100bps they were already receiving to bake in a total return north of 100%.

A masterclass in financial engineering, fires me up.

Disclosure: Nothing written here is financial advice or should be used for investment decisions.

Components of a Good Business

Oftentimes in interviews you’ll be asked: What are the components of a good business or what is a good business today and why?

Tricky questions if you come unprepared. I’ve certainly been caught flat-footed a few times. Today, we will take the lens of a fundamental analyst.

As a college student, this can be really challenging because your perception of a good business may not be financial. A good business to you may mean a buzzy business with a good growth story: Celsius for example (the energy drink company not the defunct crypto exchange).

When working full-time in banking or consulting, you can get so caught up in the weeds of managing deal processes or projects that you practically ignore what the company actually does and whether or not it is a strong business.

-Number 1: Free Cash Flow

You wouldn’t take a job if you weren’t paid right?

Same principle here. Don’t buy businesses that don’t make any money. You want consistent free cash generation so that the Company can a). pay its debt and not go into bankruptcy, b). pay you a dividend, and c). organically reinvest in the business to avoid raising capital which either comes with dilution (raising equity) or extra leverage (raising debt).

More on free cash flow here: "The Pulse" --#33

-Number 2: Monopolistic or Deep Mote

A business with a million competitors can be a good business but the risk of being outcompeted or being forced to push down pricing to retain market share is really high. Those factors can cannibalize an industry.

Monopolistic companies rule their domain. They have market shares north of 40% and are identified as ‘best in class.’ Think Coca Cola. As an investor, the monopolistic nature is really attractive because you can find solace knowing that the Company will always be making money as long as the entire industry doesn’t become obsolete.

Tangentially, if a Company cannot be monopolistic than it needs a deep mote. The mote can be high barriers to entry (think about starting a utilities business—tons of capital and government alignment needed) or a truly incredible product/service (Nvidia is just selling its chips off of the shelves).

-Number 3: Reasonable Leverage Profile

Your classic PE-owned POS widget manufacturer with 12.0x leverage is not a business that is likely to survive in tough times. One shitty quarter or a full-blown recession in the economy will destroy that Company because it won’t be able to pay its debt.

As mentioned here: "The Pulse" --#21

A reasonable leverage profile is industry-dependent. A truly good business will likely have a leverage profile at or below the industry average

-Number 4: Strong Management Team

The primary reason any financial business blows up is because the management team was outta whack.

Imagine if you went to the hospital for a critical surgery, you don’t want some fresh grad hungover in residency conducting that operation. You want the steady-handed surgeon with 30+ years of experience who lives and breathes operations.

Same idea when looking at businesses. You want a team who you think was quite literally put on Earth to execute the mission of whatever company is being analyzed.

-Number 5: Industry Tailwinds

There are a lot of sleepy businesses out there that fit the previous criteria. However, being positioned in a dormant industry is not a recipe for long-term success.

You want that business to be positioned at the forefront a growing industry with above-GDP YoY compounding potential.

Some other components of a good business which I won’t discuss in detail: great brand recognition, negative working capital (aspect of free cash flow), battle-tested business model (survived a recession?), clear plans to add value (capital allocation, M&A, etc), great partnerships, favorable contracts, focused lines of business, etc

*please note the tenets of a good investment are a little different (more on that later)

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“The Pulse” #52