Family offices have shown more signs of interest in CLOs this year, but it’s not only illiquidity or complexity they have to overcome — they also face quandaries over tax.
CLO equity in particular can be a compelling option for US family offices seeking yield beyond what traditional credit offers, but it can produce misaligned cash flows and tax surprises.
Imperfect patchwork strategies have emerged to help ease the bill from Uncle Sam, and the industry may yet develop others, sources tell 9fin. Chiefly, investors can employ insurance-dedicated fund structures with certain limitations, although the possibility exists for more bespoke solutions that could get around the tax rules for investing in CLO equity. Better tax techniques, at least on the margins at this point, can bring more family offices into the fold.
The bigger hurdle for CLOs remains effective marketing to family offices, sources say. We reported on the growth of that education factor for family offices last year.
After awareness, tax efficiency is key. Actual post-tax returns can be quite lower than marketed returns, and the multi-year investment cycle for each CLO necessitates careful planning.
Spooked by phantom income
Generally, CLOs are treated as passive foreign investment companies...
