How is a CDO manager compensated?
In return for managing the investment portfolio of the CDO, the CDO manager receives a management fee. Such a fee is often made up of two elements, a base management fee and an incentive management fee. The base fee is usually a flat fee on the value of assets invested. The incentive fee is strongly performance related. In the case of the Duchess CLO funds for example, this fee can only be paid out if an absolute performance level has been reached. This level, which is based on the forecast returns of the Secured Income Notes (“SINs”), is called the hurdle rate. After reaching the hurdle rate, Babson Capital Europe will receive a share of the profit generated. In addition, Babson Capital Europe’s parent MassMutual is a substantial investor in the SINs of its funds and therefore benefits directly when the funds perform well.
