Asset managers think European collateralised loan obligations (CLOs) have matured. Recent developments mark a pivotal chapter in CLO growth trajectory, including a large rise in the amount of assets under management (AUM) belonging to ETFs built around these instruments.
CLOs package together loans of varying risk levels made to companies. They are a form of fixed income, or ‘alternative’ credit.
As private credit evolves beyond its traditional leveraged buyout roots in Europe, managers are under pressure to build “all-weather” platforms, according to an analysis by Paris-based investment consultancy Indefi. CLOs are becoming a key component of broader credit offerings – bridging liquid, illiquid, and hybrid strategies.
Demand for private credit is expanding from institutional investors to wealth and retirement channels, meaning CLOs also present a critical fundraising lever. Strategic partnerships, particularly with large institutions providing seed capital, are fuelling platform expansion and enabling managers to capitalise on structured credit opportunities. Meanwhile, industrialising origination – through proprietary sourcing and bank partnerships – is enhancing deal flow. According to Deutsche Bank analysts, US CLO ETFs surged to over $20 billion by end-2024 from $2.25 billion in 2023 – a nearly tenfold rise. The growth highlights rising recognition of CLO-ETF benefits and signals retail investor appeal. The fact ETFs are listed on exchanges and trade like equities could add to the resilience of CLOs.
“A healthier issuance environment”
“The European CLO market has matured in recent years, thanks in no small part to the growth of the captive CLO equity fund sector. Reduced M&A activity has triggered a wave of refinancing in the leveraged finance market, lowering borrowing costs and extending loan maturities,” says Sam McGairl, portfolio manager for syndicated loans and structured credit at investment firm Muzinich & Co. “Fundamentally, the loan market is better placed to withstand an economic downturn than it was two years ago.”
“We’ve seen interest in US and EU CLO tranches over the past 12–18 months, driven by their attractive spreads compared to similarly rated corporate credit.
This certainty in equity execution has allowed managers to become more programmatic in their issuance rather than opportunistic, he adds, resulting in improved liquidity and a healthier issuance environment overall.
The Global CLO market has nearly doubled in size to $1.3 trillion (Bank of America, as of December 31, 2024) since 2018 and is now the largest asset class in the private-label securitised products universe, cites Michael Craig, head of European senior loans at Invesco Private Credit.
While issuance continues to surge, demand is expanding into new vehicles, Craig adds, referencing the growth in CLO ETFs. Should Europe follow a similar trajectory, issuance could reach record highs.
Cathy Bevan, head of structured credit at alternative credit manager Alcentra, adds: “We’ve seen interest in US and EU CLO tranches over the past 12–18 months, driven by their attractive spreads compared to similarly rated corporate credit. As credit spreads tightened, particularly in high yield, demand for CLO tranches rose. European tranches, priced wider than US ones, gained traction in late 2024 and early 2025. We see investment opportunities in both primary and secondary markets, with stronger credit fundamentals in Europe adding to their appeal.”
“Striking a Balance”
Despite the expansion, CLO managers may be cautious about the macro environment and credit risk. “The balance between conservatism for debt investors and generating enough spread for equity returns is one all portfolio managers have to strike,” says McGairl. He explains that while loan markets are better positioned to weather economic downturns compared to two years ago, risks remain.
Sid Chhabra, head of securitised credit at RBC BlueBay Asset Management, agrees that a strong fundamental picture underpins the market, but adds that “volatility and economic uncertainty could lead to a period of weakness in European CLO spreads”. Sustained macro weakness may widen spreads, cautions Chhabra, especially in the lower tranches of the capital structure, despite strong technical demand.
With fallen interest rates in both the US and Europe, refinancing activity has picked up, which has helped improve cashflows and extend loan maturities. Invesco’s Craig points out that “the higher-for-longer theme continues to resonate”, and managers are focusing on key metrics like interest coverage and balance sheet resilience to manage risk.
Chhabra highlights the importance of careful credit selection in the current context, especially with potential ripple effects from geopolitical uncertainty and German fiscal policy shifts. “Managers should be cautious on issuers with over-leveraged balance sheets or where liquidity remains tight,” he says, noting the risk of restructurings if earnings fail to grow.
Daire Wheeler, head of liquid credit at Alcentra, adds that the active nature of CLOs allows managers to adapt quickly to changing market conditions. “Given the underlying loans are liquid, CLO managers are able to reposition their funds to reflect their views on individual sectors as well as to manage tail risk in their portfolios,” shares Wheeler.
Wheeler also notes that interest rate volatility poses less of a threat to CLOs as the structure and assets are predominantly floating rate, and borrower credit fundamentals remain robust. The market’s defensive sector tilt and greater diversification, aided by recent growth, also support its resilience, adds Wheeler.
“We actively repositioned our portfolios towards more defensive sectors earlier this year and increased cash balances ahead of recent market volatility. This leaves us in a good position to drive positive performance for our funds in the current market environment.”
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Investor appetite and portfolio role
“One of the compelling aspects of CLOs is that they allow investors to allocate based on risk appetite,” says McGairl at Muzinich. “Most investors should consider CLOs when considering their short-duration fixed income allocations.”
Craig at Invesco adds that AAA CLO notes and AA tranches are increasingly viewed as cash alternatives, while lower-rated notes serve as high-income generators for long-term, pro-risk investors. “The tranching of the CLO structure enables investors to choose the risk/return makeup that suits their needs,” says Craig.
The US and European CLO markets are different. The US market is larger, more liquid and has a broader manager base, but experts think the European market is catching up. For instance, European CLOs tend to have higher bond buckets and more subordination below AAA tranches, including single-B tranches that are rare in the US, explains McGairl, adding that the European market’s continued growth gives global investors an attractive option to get exposure to the asset class.
Regulatory outlook
Annual European CLO issuance could double to €75 billion by 2030, with Indefi noting the asset class is well positioned to benefit from the blurring line between public and private markets.
Europe has been a bit too restrictive in the way it views CLOs as investments, according to Jenny Holmgren, senior engagement manager at Indefi. Higher capital charges stemming from regulation afflict CLO investments for insurers, along with a general preference for simpler products, have hindered the asset class from reaching the scale seen in the US, she says.
Similarly, Bevan says Solvency II regulations mean that EU insurers are not as active in buying CLO tranches as their US counterparts are. This leads to spreads on European AA, A and BBB CLO tranches generally wider than the US equivalents.
“There’s scope to tweak the Solvency II framework to view CLO tranches more favourably. Unlike the US, Europe still enforces risk retention rules, so all EU CLOs are structured to comply, while most US CLOs are not,” shares Bevan. This situation makes it harder for regulated EU investors to construct a geographically diverse portfolio of CLO tranches.
Change may be on the horizon. McGairl notes growing openness among regulators, with the European Commission actively considering revisions to securitisation rules – a positive sign of progress. Holmgren adds that while “no pen has been put to paper yet”, the industry expects regulations to become more flexible in the coming years, potentially doubling issuance volumes and significantly boosting institutional allocations.
“Compared to other credit instruments, [the CLO is] not necessarily that much more complex,” says Holmgren. “It delivers what it’s supposed to deliver – low defaults – which is why we’re seeing the surge in demand today.”
ESG considerations are also becoming a part of CLO design and investment criteria. Chhabra explains that integration typically comes via exclusions written into deal documentation, but the quality of documentation differs with both the number of exclusions and the strength of thresholds varying across deals. Nonetheless, momentum is building and, as Holmgren sums it up, “we’re still at the start of what we expect to become a CLO wave over the next couple of years”.
