CLO Private Credit Funds: The $1 Trillion Dollar Asset Class

CLOs (Collateralized Loan Obligations) are actively managed, diversified pools of senior-secured loans primarily to large U.S. corporations. Underlying CLO pools typically contain hundreds of floating rate, high yield, below investment grade loans. Active management is important for CLO managers, who are empowered to navigate changes in credit markets and individual companies.

Securities issued by CLO pools are available in a variety of tranches. Each tranche offers a risk/return profile based on its seniority and its order in the claims on the interest and principal payments from the underlying pool of loans. CLO tranches range from investment grade (AAA - A) to mezzanine, which include senior and junior mezzanine that are primarily non-investment grade (BBB - B). CLO equity receives the residual interest available after payments to other tranches. Investors can select the type of CLO that fits their objectives.

CLO investors represent a diverse, global community. CLOs benefit from high daily trading volumes, liquidity, and an expanding investor base. The global CLO investor community encompasses banks, insurance companies, pension funds, hedge funds, and asset managers, as well as mutual funds and ETFs.

While CLOs offer many benefits, investors must understand the risks. Credit risks include problems with underlying borrowers and potential losses from default. Market risks include illiquidity during periods of distress. People risk refers to the wide dispersion of performance among CLO pool managers. Reinvestment risk results when underlying loans are prepaid, potentially interrupting cash flows. These are just a few of the risks CLO investors should know.