By Helle Pilia, Head of Client Service Delivery, Loan Administration, UK
Shrinking spreads, growing pressure to diversify, and investor appetite for liquid credit are pushing private debt firms toward collateralised loan obligations (CLOs). But while the opportunity is clear, CLOs come with a different set of regulations and risks. Here’s what every private debt manager should know about risk and regulatory compliance before diving in.
Over the past three years, we’ve seen a growing number of private debt (PD) managers exploring a new strategy: launching CLOs, a sign the market is shifting. This isn’t a passing trend; with firms like Warwick Capital Partners closing their first $400M CLO in 2023 and recently closing their sixth, and with similar moves across the global market, we expect to see more of this cross-pollination in the months and years ahead.
Why CLOs, and why now? CLOs offer access to more liquid credit strategies and new investor types, but they also come with their own set of risks, operational requirements, and a very different model of credit exposure.
In this article, we’ll explore what’s driving this trend and what PD managers should know before making the leap.
What’s driving this shift?
CLOs aren’t new, but they’re attracting new attention from firms outside the traditional CLO ecosystem. For many private debt managers, the timing feels right for a strategic pivot, driven by a mix of structural and market shifts:
- Tighter spreads have forced their hand: Returns from traditional private credit strategies are prompting managers to seek higher-yielding alternatives
- Firms are more mature: Many PD managers now have the scale and resources to pursue multi-strategy growth
- Investor appetite is shifting: LPs increasingly want diversified exposure to liquid credit, not just buy-and-hold portfolios. CLOs offer significant diversification through pools of 150-250 non-investment grade loans
- Credit enhancement: CLO notes are issued in tranches, providing senior tranche investors with additional protection from defaults on underlying loans
- Operational infrastructure has caught up: New technologies and knowledgeable experienced service providers make CLO management more accessible than ever
- The CLO market is deep: CLOs tap into a larger, more liquid investor base, creating new opportunities to scale while providing investors with stronger liquidity through secondary market trading
CLOs vs. private debt: what’s different?
At their core, CLOs are built from large pools of broadly syndicated loans (BSLs): tradable loans arranged by investment banks and sold to a pool of lenders, corporate loans issued with lower credit ratings and/or loans taken out by private equity from banks to assist with leveraged transactions. This structure represents a significant departure from the way most PD managers operate.
Private debt strategies are typically very hands-on; managers underwrite loans directly, work closely with portfolio companies, and stay involved post-investment. CLOs involve buying syndicated loans on the secondary market, often with no direct relationship to the borrower. You’re relying on information from lead arrangers, not managing credit directly.
What this means for PD firms: A very different risk posture, more emphasis on portfolio composition due to diversification requirements and increased operational complexity and compliance obligations.
What are the biggest challenges for private debt firms entering the CLO market?
#1: Risk retention requirements
CLO managers must retain a portion of the structure to align their interests with investors, which can tie up capital and complicate fundraising models.
#2: Technology investment
Managing a CLO requires robust technology, which can be a significant lift for firms built around spreadsheets and case-by-case deal models.
#3: Operational scale
Expanding into CLOs without dramatically increasing your headcount is possible, but only with strong third-party partnerships and automation tools to offset the administrative burden.
What’s the typical timeline and infrastructure needed to launch a CLO?
Getting a compliant CLO off the ground is no small feat. Here’s what to consider:
- Loan inventory: CLOs require a warehousing period, where loans are sourced and held in advance of issuance. You’ll need enough volume and diversity to meet investor and regulatory thresholds
- Ongoing compliance testing: CLO portfolios must pass a wide range of tests, including rating distribution, industry exposure, interest coverage ratios, and more. This testing doesn’t simply apply at launch; it’s a continuous process
- Third-party relationships: You’ll need to build new relationships with trustees, ratings agencies, and data providers to monitor and validate performance
- Purpose-built tech: CLO management platforms must aggregate loan-level data, simulate hypothetical trades, run real-time compliance tests, and support shadow booking alongside the trustee
- Operational expertise: CLOs are significantly different from traditional private debt management. You’ll need staff (or partners) who understand collateral management, reconciliations, and regulatory reporting
How we can help
Entering the CLO market can expose private debt firms to new capital, new investors, and strategic growth, but it demands a different operational playbook. Our CLO team can help you build the right foundation and scale sustainably with back- and middle-office support. We work with industry-leading platforms like Allvue to deliver comprehensive, end-to-end CLO management solutions that empowers managers with integrated portfolio, trading, compliance, and accounting tools—built to handle complex workflows, streamline operations, ensure regulatory compliance, and enhance decision-making across the full CLO lifecycle. We also work with ClearPar for loan settlement.
Our CLO team can help you build the right foundation and scale sustainably with back- and middle-office support. We work with industry-leading platforms like Allvue to deliver comprehensive, end-to-end CLO management solutions that empowers managers with integrated portfolio, trading, compliance, and accounting tools—built to handle complex workflows, streamline operations, ensure regulatory compliance, and enhance decision-making across the full CLO lifecycle. We also work with ClearPar for loan settlement.
Our track record includes successful partnerships such as supporting a European investment firm with their U.S. expansion through CLO launch and delivering fund and loan administration services for a leading private debt manager. We support clients by providing tailored solutions across different market entry strategies and operational needs.
Our services include:
- Monthly reporting and waterfall calculations
- Liquidity reporting
- Loan settlement support across warehouse, ramp-up, and post-pricing phases
- Entity set-up and accounting
- Trustee reconciliations
- Collateral management
Contact our team today to learn how we can support your strategic growth.
