CDO equity returns

Given the tightness of mezzanine spreads, equity returns in structured finance CDOs are getting narrower. Does investment in CDO equity still make sense?

Brian McManus, Head of CDO research, Wachovia Securities

Buyers have to be wondering when equity internal rate of returns (IRR) will be too small to warrant the risk of investing in this class. A widening of systemic risk premiums is long overdue. Since the piercing of the equity bubble, money managers have been searching for alternative high-yielding assets. We have seen interest in commodities, collectables, real estate and leveraged finance vehicles leading to higher prices across the board