Why Private Credit CLOs?

Why Private Credit CLOs?

April 2026

We believe private credit loan exposure can be compelling when accessed through CLOs. The CLO structure enhances diversification, defensiveness, leverage efficiency, and liquidity in ways that direct lending funds cannot easily replicate.

1.  Diversification

In private credit, where individual credit outcomes can vary significantly, diversification is a powerful risk mitigant. CLOs provide investors with multiple forms of diversification:

• • Broad borrower exposure: CLOs typically hold a diversified pool of senior secured loans (often 75 or more holdings).
  • Industry caps: All CLOs include sector concentration limits (often around 10-15%), which may help reduce exposure to any single industry.
  • Manager diversity: Allocating across multiple CLOs provides exposure to different underwriting teams, sourcing networks, and portfolio construction philosophies.

2.  Defensiveness

CLOs concentrate on the conservative segment of private credit — senior secured, first-lien loans. These loans sit at the top of the borrower’s capital structure and may offer lenders certain protections in two key ways:

• • First in line for repayment: These loans are generally first in line for repayment if a business faces operational challenges.
  • Superior historical recoveries: Recovery rates on senior secured, first-lien loans have historically been higher than those on second-lien, unsecured, or subordinated debt that is often found in direct lending funds.

3.  Leverage Efficiency

The CLO structure provides built-in leverage done on terms we believe are favorable and may be accretive to returns. 

• • Term-matched: Leverage is locked in for the life of the CLO, which may reduce refinancing risk.
  • Non-mark-to-market: A CLO’s leverage is largely fixed at inception and is generally not contingent on changes in valuations of loans in the underlying portfolio. By comparison, many direct lending funds employ market-based financings.

4.  Liquidity

CLOs are issued as securities, making them tradable and providing investors with a number of benefits when compared to direct lending funds.

• • Liquidity: CLOs have an active primary and secondary market, which may enable investors to buy or sell these securities daily.
  • Price discovery: Market-based pricing provides more timely transparency that is unavailable in many private credit funds.

Together, these features may make CLOs a structurally efficient and scalable way to access private credit while balancing risk, return, and liquidity.

Shiloh Bates

Chief Investment Officer