Herzfeld Caribbean Basin Fund: A New Chapter in CLO Equity

The Herzfeld Caribbean Basin Fund, Inc. (CUBA) has announced a significant shift in its investment strategy, marking a new chapter for the fund and its shareholders. The Board of Directors has approved a change in the fund's primary objective, moving away from Caribbean Basin investments to focus on a CLO Equity Strategy. This strategic pivot aims to enhance value for shareholders by leveraging market dynamics and the fund's closed-end fund structure.



The Fund's new investment objective is to generate total returns and high current income for shareholders by investing in equity and junior debt tranches of collateralized loan obligations (CLOs). CLOs are portfolios of collateralized loans consisting primarily of below investment grade U.S. senior secured loans with a large number of distinct underlying borrowers across various industry sectors. This change in strategy comes after 30 years of Caribbean-focused investment, with management acknowledging the long-anticipated Cuban market liberalization thesis has not materialized.



The new fee structure, approved by the Board, consists of a 1.25% management fee and a 10% incentive fee, subject to a 9% hurdle rate. This structure aligns with industry norms for CLO-focused funds and signals management's confidence in the new strategy. However, it introduces performance-based compensation that could potentially increase overall expenses depending on returns. The 9% hurdle rate suggests management's expectations for returns, providing a useful benchmark for shareholders.

The Fund's scale efficiency challenge remains a significant factor in its ability to execute the new CLO-focused strategy effectively. With a market capitalization of only $36.6 million, the Fund may face difficulties in managing a portfolio of CLO equity tranches, which typically require a larger asset base to achieve economies of scale and diversify risk. To mitigate this challenge, the Fund can consider increasing assets under management, partnering with other funds or institutions, optimizing portfolio composition, maintaining a competitive fee structure, and demonstrating expertise in CLO selection and management.

In conclusion, the Herzfeld Caribbean Basin Fund's strategic pivot to a CLO Equity Strategy represents a fundamental transformation that warrants serious investor attention. While the new strategy introduces different risks and potential returns, it also offers the opportunity for shareholders to benefit from the fund's expertise and track record in the credit market. Shareholders should carefully consider the potential implications of this dramatic change and evaluate whether the new strategy aligns with their investment goals.