Article/Intelligence
Private Credit CLO Market Sees Wave of Structural Innovations Amid Explosive Growth
As investors grow comfortable with private credit CLO structures and with spreads having tightened over the last year, more and more firms are entering the market as issuers. This year Apollo Debt Solutions, HIG Whitehorse and Kohlberg and Co. launched new private credit CLO shelves, and sources say that a growing number of broadly syndicated loan CLO managers are at various states of setting up private credit CLO platforms
According to Octus CLO primary data, U.S. private credit CLO issuance reached a record $41.77 billion in 2024, representing 19.6% of total CLO issuance, alongside $26.93 billion in reset and refinancing activity, or 8.57% of the total volume. That growth has continued into 2025. As of July, private credit CLOs accounted for 16.7% of total CLO issuance this year, totaling $16.3 billion. Reset and refinancing activity surged even more, with $26 billion in private credit CLOs reset or refinanced, which is 16.71% of the year-to-date reset or refi volume and just $930 million short of the full-year 2024 total volume.
The momentum has also extended beyond the United States. In November 2024, Barings priced the first European middle market private credit CLO, Barings Euro Middle Market CLO 2024-1, at €380 million. In June 2025, Ares completed Ares Euro Direct Lending CLO 1, the first sterling-denominated private credit CLO and the first in Europe to be structured with a reinvestment period, at £305.1 million.
In this rapidly growing market, Golub, Cerberus and Blue Owl rank among the top managers owned by insurance companies and 40 Act funds, according to data provided to Octus by New Debt Exchange.
Blue Owl, which ranks third among private credit CLO managers by AUM, takes a similar approach. “Unlike a BSL manager that creates a CLO as the fund itself, we are utilizing existing funds and tapping the CLO market to leverage that equity,” said Jerry DeVito, head of structured products and fund finance at Blue Owl. The asset manager has about $60 billion in debt commitments across its platform, with CLOs representing roughly 15%.
Like many other private credit managers, Blue Owl retains 100% of the equity at the fund level. “Sometimes we might retain a junior piece of the mezz because we could potentially sell it later if we want to create liquidity,” DeVito added.
Blue Owl’s private credit strategy includes two types of vehicles – business development companies, or BDCs, and private credit funds.
BDCs are typically formed as affiliates of larger fund managers and often publicly traded. As regulated entities, BDCs offer transparency through regulatory disclosures and serve as a proxy for middle market credit performance.
“In our BDCs, we typically issue triple-A to single-A-rated bonds and retain everything below,” DeVito said. “In our private funds, we may go down to triple-B if spreads are attractive.”
This special affiliated entity structure allows middle market CLO managers to repurchase and substitute underperforming credits from their CLO portfolios, which has been a unique advantage.
“We create a special purpose subsidiary in the SPV, transfer a portfolio of assets into the SPV, and issue a CLO,” Devito said. “Since we own the equity and manage the CLO, we can substitute assets in and out, subject to limits, to maintain a high-quality portfolio and stay compliant with our tests.”
Golub’s George echoed this structure flexibility, saying: “The majority of our CLOs are issued out of our $60 billion private fund complex that owns almost exclusively first lien credit. And we usually have a billion or sometimes $2-plus billion of undrawn equity at the funds that we can draw down to help limit risk within our CLOs and other financing structures.”
Other managers, such as Monroe Capital, view CLOs less as a financing tool and more as part of a growth strategy.
“The tradeable credit side of our CLO business is approximately 25% to 30%. The remaining balance of our CLO AUM consists of Monroe directly-originated assets or club transactions, led by other middle market peer managers in which Monroe will often obtain a joint leader arranger title,” said Chris Enas, managing director and deputy portfolio manager at Monroe.
“For BSL CLOs, we believe investors are underwriting on their trading strategies and performance,” Enas added. “For middle market CLO managers, investors are looking at managers themselves to understand their investment strategy and how they manage their portfolios.”
Private credit CLO ratings have historically shown strong resilience. According to S&P Global Ratings, only 10 tranche ratings were downgraded over the past five years, mostly among subordinate tranches of amortizing deals that originated before the 2020 pandemic.
Alongside this tranche rating resilience, an increasing need for better secondary market options has arisen. CLO exchange traded funds, or ETFs, which first emerged in 2020 and have grown to a $30 billion asset class, have broadened their reach into the private credit CLO space.
BondBloxx and Virtus were the first movers, both launching private credit CLO ETFs in December 2024.
According to Fintel, the BondBloxx Private Credit CLO ETF holds 55 securities with a portfolio value of $108.4 million, and the Virtus Seix AAA Private Credit CLO ETF holds 28 securities valued at $18.2 million. The Virtus fund targets floating-rate triple-A private credit tranches, with an 80% floor in its investment guidelines.
Regarding liquidity concerns around private credit, John Wu, head of structured credit and portfolio manager at Seix Investment Advisors, noted that private credit CLO ETFs do not trade the underlying private credits themselves but rather the tranches of CLOs.
“ETF is a very small percentage, still, of the overall private credit CLO space that the amount of liquidity available relative to how much we need is extremely large,” Wu said.
Virtus Seix’s largest holdings include transactions from Owl Rock, Blackstone and MidCap, each representing less than 5.5% of the portfolio.
“We try to mitigate private credit manager underwriting risk through diversification. Because transparency is lower here than in the BSL market, we have less knowledge of the underlying portfolios,” said Wu, who also raised concerns about rapid growth leading to spread compression, increased leverage and weaker credit underwriting over time.
This rapid expansion has led to a rise in covenant-lite or covenant-loose structures, which feature fewer financial maintenance requirements on borrowers, particularly in larger deals.
S&P reports that the covenant-lite cap in new MM CLOs rose to 25% in the first quarter of 2025 from about 16% in 2021 vintages. Currently, 6.3% of credit-estimated MM CLO exposures are classified as covenant-lite.
“While maintenance covenants are still the standard in most private credit agreements, we see that their effectiveness has deteriorated due to increasingly generous leverage limits that make it harder for lenders to act on early signs of borrower underperformance,” S&P analysts noted in their second-quarter report.
This has drawn more scrutiny from investors and regulators, prompting greater focus on underwriting quality.
“[In the middle market space,] it’s truly differentiated. Not everyone has the same strategies or the same sponsors, so transparency and a fundamental understanding of the underlying assets is critical when underwriting the space,” said Golub’s George.
Enas at Monroe told Octus that the key metrics for analyzing a private credit CLO portfolio are interest coverage, covenant cushions and liquidity. “We have to understand what the next 12 months look like, how cash flows behave, and what our liquidity picture is,” Enas said. “Our book tends to average just under 2x interest coverage.”
Unlike BSL CLOs, which rely on public credit ratings, private credit CLOs require ratings agency credit estimates for their obligors. According to S&P’s first-quarter data, 70% of credit-estimated obligors saw year-over-year revenue growth, while 64% reported higher EBITDA. Larger loan sizes are also becoming more common. The share of this cohort of obligors with EBITDA of more than $100 million more than doubled since 2021, while those under $30 million dropped to about 50%.
“For large managers like us, the loans we’re originating are for large companies, very similar to what you’d see in a BSL CLO,” DeVito said. “Investors are beginning to realize this is comparable.”
Documentation terms are also shifting. Legal research firm Chambers and Partners said in a report earlier this year that private credit financial covenants increasingly resemble those in syndicated deals, often featuring springing covenants on revolvers rather than full-facility maintenance tests.
In the first quarter of 2025, 83% of credit estimates were affirmed, while 9% were downgraded and 8% upgraded. The downgrade-to-upgrade ratio of 1.07 was up slightly from 1.04 in the first quarter of 2024. While the data predated the imposition of tariffs, S&P expects limited impact on credit-estimated middle market CLO portfolios given their service-sector concentration in areas such as software, healthcare and professional services.
“Industries that have historically gone to direct lenders are typically less exposed to international supply chains,” said Jake Pollack, global head of credit financing at JPMorgan.
Alyssa Irving, a fixed-income portfolio manager at Wellington Management, said in a statement to investors recently that private credit is creating an attractive tailwind to the fundamentals of the broadly syndicated loan market. “There is a willingness to finance the companies that might have otherwise faced challenges refinancing over the last couple of years,” Irving said.
Irving added that some of the weakest issuers from 2023 were refinanced through private credit, keeping BSL defaults muted and offering a structural backstop to the market. “Broadly syndicated CLO investors are benefiting from a growing lender in the space that’s willing to finance some of the highly levered companies that the broadly syndicated market may not lend to.”
Looking ahead, DeVito at Blue Owl believes in the continued trajectory of the private credit CLO growth, saying that there will be organic growth in the size of the market as an increasing number of managers use CLO structures for financing.
“In the middle market, asset sizes are growing; therefore, as we increase our debt with the growth of the market, you will see more private credit CLOs coming out,” DeVito said. “In the BSL CLO market, some managers are also doing private transactions now, so there are some assets moving over to this market.”
Heading into the second half of 2025, and with added complexity from tariffs and other geopolitical tensions, private credit CLOs are likely to face closer scrutiny as market growth continues. Navigating the balance between innovation and discipline will be a key focus for market participants.