When money manager Sound Point Capital Management recently started anew closed-end fund tied to loans, an affiliate of the Koch family bought a large portion of it. The fund, Sound Point Meridian Capital, invests in CLO equity, securities that are first in line to absorb losses on loans to leveraged companies that are packaged into collateralized loan obligations.

Institutional investors have been piling into private CLO equity funds, which provide yields that can approach 20%, thanks in part to the use of leverage. Similarly, closed-end CLO equity funds that are listed on an exchange —making them available to the public — often trade at a premium to the net value of their holdings, a sign of high demand and low supply.

Fewer than 10 of these closed-end funds trade now, partly because starting one requires a backer such as Koch that’s willing to invest hundreds of millions up front and leave the money invested for years. The reward for these backers can include a share of lucrative fees the funds charge, as well as a big stake in their high-yielding shares. […]