Cliffwater Corporate Lending Fund’s Below-Average Leverage Effectively Higher Than Reported Given CLO and BDC Equity Interests; Fund Has Limited Exposure to PIK and Nonaccruals

Relevant Items:
Financials for Period Ended Sept. 30
FY’25 Financials
Octus’ BDC Database

As of Sept. 30, Cliffwater Corporate Lending Fund reported $40.6 billion of investments in securities, including $27.6 billion to corporate securities. In addition to a sizable book of direct loans to corporate borrowers, Cliffwater Corporate Lending Fund also invests in a number of private credit lenders, including equity investments in nontraded business development companies, or BDCs, and collateralized loan obligations issued by private credit lenders.

The fund maintains low leverage of just 0.31x debt to equity as of Sept. 30, 2025, which is significantly below average BDC leverage, as calculated by Octus, of 0.86x. Leverage is consistent with Cliffwater Corporate Lending Fund’s disclosures stating that it is authorized to borrow cash “in connection with its investment activities, to satisfy repurchase requests from Fund shareholders, and to otherwise provide the Fund with temporary liquidity,” but borrowings would be limited to 33.33% of the fund’s assets or 50% of its net assets.

Cliffwater Corporate Lending Fund, however, also invests significant capital in inherently higher-leverage securities, such as equity of private CLOs and nonlisted BDCs. For this reason, market commentators appear most concerned with the fund’s exposure to private credit lenders and private CLOs, which represents approximately 30% of total investments at cost as of Sept. 30, 2025.

Cliffwater Corporate Lending Fund is structured as an interval fund, meaning that it offers to investors equity on a continuous basis and allows for, but limits, the amount of withdrawals. In the 12 months ended Sept. 30, 2025, Cliffwater Corporate Lending Fund raised gross equity of $12.1 billion, or 53% of the net asset value as of Sept. 30, 2024. Approximately 14% of equity was repurchased from shareholders in the LTM period.

In addition to Cliffwater Corporate Lending Fund, the company also manages two other funds:

• Cascade Private Capital Fund, with $5.1 billion of assets under management over 238 investments; and
• Cliffwater Enhanced Lending Fund, with $7.8 billion of assets under management in over 3,000 credits.

In 2025, TPG and Temasek announced a “substantial” minority investment in Cliffwater LLC, and joined TA Associates as minority investors. Cliffwater’s management maintained majority control.

Summary Financials

Cliffwater Corporate Lending Fund has experienced rapid growth funded by both debt and equity capital. Octus calculates a cash return on its investment portfolio of 9.5% in the last 12 months ended Sept. 30, 2025. Although returns have been coming down, the decline is in line with BDCs, given lower base rates and competition for new loans.

A sharp rise in cash paid as dividends has resulted in Cliffwater Corporate Lending Fund burning cash after paying dividends. In 2025, investors chose to receive more dividends in cash rather than reinvesting back into the fund, resulting in the swing from positive to negative free cash flow. In fiscal year 2024 ended March 31, 2024, investors reinvested $426.6 million of dividends back into the fund. In the LTM period ended Sept. 30, 2025, just $118.5 million was reinvested back into the fund.

Octus’ calculation of cash flow is prior to net investment activity but subtracts dividends from operating cash flow.

Cliffwater Corporate Lending Fund’s corporate security profile totaled $27.6 billion at fair value and consisted largely of first lien secured debt.

A summary of the fund’s debt portfolio is below. Cliffwater does not report nonaccruals, but comparing the company’s list of loans to Octus’ third-quarter nonaccrual report suggests 10 loans representing approximately 0.7% of total corporate debt cost were on nonaccrual status as Sept. 30, 2025. The actual amount could be higher to the extent certain loans are not held by BDCs so would not be captured by our analysis or if Cliffwater has different standards related to putting loans on nonaccrual status. Octus estimates total nonaccruals across all BDC loans was 1.51% of cost as of Sept. 30, 2025, putting Cliffwater’s results below the rest of the industry.

Cliffwater claims that because its business model allows it to source loans from multiple managers, the fund benefits from increased diversification and loan selection. A list of BDCs that Cliffwater has invested in is further below in this article, in the section “BDC Equity.” Cliffwater Corporate Lending Fund has made loans to more than 1,000 companies – at least 5x higher than the average BDC.

The vast majority of loans in Cliffwater Corporate Lending Fund’s portfolio are floating. Just 2.4% of floating rate loans were priced below 90% of par as of Sept. 30, 2025.

Just under 7% of loans included some form of PIK as part of the stated interest, in line with the BDC industry. Approximately 10% of loans mature prior to 2028, with many loans not maturing until 2031.

According to the fund’s fact sheet, its investments have an average loan to value of 41% and generate average EBITDA of $105.2 million.

A breakdown of Cliffwater Corporate Lending Fund’s exposure by sector is shown in the table below.
Sector investments include senior debt, subordinated debt, equity and options.

Similar to BDCs and other private credit investors, technology represents a significant portion of investments, and software likely makes up a significant amount of Cliffwater Corporate Lending Fund’s technology investments.

In total, technology represented 26.1% of corporate investments at fair value as of Sept. 30, 2025, slightly higher than each of the prior two reporting periods. However, as analyzed by Octus in our BDC software exposure article, actual software is likely higher than reported by Cliffwater Corporate Lending Fund since a number of companies included in other sectors, such as business services and health care, likely have as their primary business model software and related services.

In Octus’ software exposure article, we found that actual BDC exposure to software companies was closer to 30%, as compared with BDC-reported amounts of closer to 20%. Therefore, it is possible that Cliffwater Corporate Lending Fund’s actual software exposure exceeded 30% as of Sept. 30.

In the last 12 months ended Sept. 30, health care represented the greatest increase in lending activity of Cliffwater Corporate Lending Fund’s corporate security exposure.

Interest income from investments in the “equity” class of CLO funds will be recorded based upon an estimate of an effective yield to expected maturity utilizing assumed cash flows in accordance with FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Effective yields for the CLO equity positions are updated generally once a quarter or on a transaction such as an add-on purchase, refinancing or reset. The estimated yield and investment cost may ultimately not be realized.

CLOs

As shown above, Cliffwater Corporate Lending Fund’s largest exposure to private investment vehicles is through investments in CLOs. As of Sept. 30, 2025, Cliffwater Corporate Lending Fund reported $7.4 billion on a cost basis and $7.7 billion on a fair value basis in private CLO exposure. Largest single-name manager exposure included Adams Street Partners, Ares, BlackRock, Guggenheim and Silver Point. In Cliffwater’s investment vehicle exposure, we also include their investments in public CLOs, which appear to all be in publicly issued middle-market CLOs that invest in private credit.

The fund maintains exposure across multiple classes with significant exposure to junior classes. Holdings in Adams Street Partners’ ASP Summa funds include classes A through E. Additionally, in at least some of the cases, it appears that Cliffwater Corporate Lending Fund consolidates the entire issued CLO. As of Sept. 30, the fund reported a cost basis of $645.1 million in BlackRock Shasta Senior Loan Fund VII LLC. According to Morningstar’s ratings report of the fund, original principal as of Dec. 8, 2021, was $658.7 million. Similarly, Cliffwater Corporate Lending Fund reports multiple classes (A through E) for Adams Street Partners funds and has over $1 billion of exposure to Silver Point Loan Funding LLC.

Although the exact nature of the CLOs is unclear to Octus, BlackRock Shasta Senior Loan Fund and other Cliffwater-held CLOs are private in nature, meaning that the vehicle does not trade to the public. Privately held CLOs are often originated and placed to specific counterparties to gain exposure to large, direct lending portfolios, allowing the manager to gain back leverage on the existing collateral while giving the investor direct, leveraged access to the same collateral pool. In the past, other managers, including HPS, have utilized private CLO technology on existing collateral pools. HPS’ Palisades CLO looks to be partially placed to Cliffwater, specifically the B (AA rated at SOFR+500 bps) and C (A rated at SOFR+875 bps) tranches. Palisades CLO incorporation can be seen below and found on page 16 HERE.

Bilateral deals have also been seen in the market, including Legal & General’s backing of Ares Direct Lending CLO I, which was the first reinvesting middle-market CLO that was denominated in sterling. By acting as a bilateral counterparty, the investor still gets access to the entire cash flows of the portfolio with greater visibility, while maintaining optionality in the form of CLO debt. As seen in the breakdown of total investments, Cliffwater holds above 16% of its portfolio in private CLOs, displaying the use case of CLO technology to gain leverage on direct lending portfolios.

Although Cliffwater appears to have exposure to multiple series and tranches within each CLO, it is not known what proportion of holdings it has relative to the total issued CLO. For instance, it is possible that in certain CLOs, Cliffwater retained a larger percentage of the equity, and it is possible that in certain CLOs, Cliffwater owns none of the equity.

This is evident in the public CLO exposure, which lists interest rates common with junior tranches.

For instance, Cliffwater Corporate Lending Fund’s filings indicate that it held interest in Deerpath Capital CLO 2023-2, which was priced on Dec. 4, 2023. Given that the coupon on the tranche is listed at SOFR+660 bps, the information would correspond with the Class D tranche, which is the BBB- rated tranche on the deal, with a total size of $21 million, of which Cliffwater owns $11 million, according to its filings. Class D sat right above the equity, prior to the reset of the deal in December 2025. Both the initial deal as well as the reset were arranged by GreensLedge Capital Markets.

Additionally, the same information can be derived from Cliffwater’s ownership in ABPCI Direct Lending Fund CLO XII, which is listed with a coupon of SOFR+825 bps. ABPCI CLO XII was arranged by Societe Generale and priced on May 1, 2025. The CLO was a total size of $820 million, and the corresponding coupon would be the Class E notes (rated BB-), with a discount margin of 825 bps. Cliffwater filings show ownership of $16.08 million, and the total tranche size is $49.2 million. The capital structure is shown below:

Finally, participation in BlackRock Elbert CLO V, which was reset and priced on April 22, 2022, would correspond to Class E, or the BB- tranche, which was placed with a coupon of SOFR+870 bps. The Class E tranche was a total size of $24 million, of which Cliffwater reports ownership of $13 million. The other tranche, which is listed without a coupon, is likely the equity tranche, which had an original total size of $50.6 million, with Cliffwater reporting ownership of $39.5 million. Should this tranche indeed reflect the equity, Cliffwater would maintain majority equity ownership of the structure in addition to the Class E tranche. The fair value on this tranche has been marked down to $14.06 million, reflecting the par erosion consistent with similar BlackRock private credit CLO equity. According to Octus’ CLO database, the Elbert CLO has exposure to recent loans either restructured or written down, such as Thrasio, Pluralsight and Kellermeyer.

Within Cliffwater’s grouping of private CLOs, holdings are somewhat more mixed but still appear to be skewed to junior tranches, based on the coupons.

Octus estimates almost 40% of Cliffwater’s CLO exposure is in the mezzanine or equity tranches of CLOs.

If our estimate is accurate, Cliffwater’s share of junior tranches effectively adds leverage to its portfolios, assuming equity tranches within these CLOs carry leverage of at least 5x.

Octus’ structured finance team discussed the recent risks to CLO equity, including reduced distributions throughout 2025.

The above charts show distributions to broadly syndicated loan CLOs, but middle-market / private CLOs could be as bad. One highly publicized example was a BlackRock private CLO, BlackRock Baker CLO 2021-1, which contains a number of stressed loans and due to write-downs failed an over-collateralization test, which likely limited distributions to equity and junior tranches.

Octus calculates approximately 10% return based on cost on its total private investment vehicle book.

Cash distributions could be lower than reported above. Cliffwater explains that income associated with its investments in the equity class of CLOs is recorded based on an estimate of an effective yield to expected maturity. These effective yields are updated. However, “the estimated yield and investment cost may ultimately not be realized.”

It is unclear if related, but Cliffwater reports in working capital a consistent outflow related to dividends and interest, which totaled $46.4 million in the LTM period and was a $136.5 million outflow in its fiscal 2025 ended March 31. BDCs analyzed by Octus tend to report a more neutral cash flow in this line item, indicating timing of income based on quarter-end. However, Cliffwater’s reporting of this item suggests a consistent over-estimate of income or delay in receiving certain income. In our analysis of cash income, Octus excludes this line item, in addition to OID amortization and PIK income.

BDC Equity

Cliffwater also maintains significant positions in equity of nonlisted BDCs. As of Sept. 30, 2025, the fund reported $2.5 billion of exposure on both a cost and fair-value basis. However, half of its exposure to BDC equity is to Barings and Golub funds.

A significant concern related to BDC equity, specific to Cliffwater, which needs to maintain current income, is the ability of BDCs to maintain or grow dividends. This has been called into question after recent quarterly reports in which a number of publicly listed BDCs have reduced dividends, including a number of public BDCs that share the same manager as certain funds below, such as Golub Capital BDC. Blue Owl Capital Corp. said that it would maintain its current dividend for the first quarter but would reevaluate it for future quarters. FS KKR Capital Corp. similarly targeted a lower payout ratio in future quarters, which combined with anticipated declines in quarterly income would imply a cut.

We would caution, however, that often investments and capital allocation strategies differ between managers listed and nonlisted BDCs.

The following chart lists each investment in BDCs by Cliffwater along with corresponding fund leverage and Octus-calculated LTM cash flow after paying dividends. The analysis comes from our third-quarter BDC analysis, which determined that more than half of BDCs did not generate enough cash from investments to cover dividends.

In addition to the above current exposure to BDCs and CLOs, Cliffwater reports $4.7 billion in unfunded commitments to these entities, with the largest exposure of unfunded commitments to Private Credit Fund C-1 HoldCo LLC totaling $839.1 million.

On Sept. 26, 2025, Cliffwater entered into a sale/buy-back agreement with Macquarie US Trading LLC in which Cliffwater assigned the below assets to Macquarie, with a corresponding repurchase obligation at an agreed-upon price within 60 days after the sale date at a funding cost of 1.816 basis points per day.

According to Octus’ BDC Database, each of the following loans is relatively large and held by a number of BDCs, with fair value pricing near par as of Sept. 30, 2025.