Article

Understanding CLOs: A guide to collateralised loan obligations

October 24, 2025
Invesco
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In today’s evolving financial landscape, investors are constantly seeking innovative ways to potentially diversify portfolios and enhance returns. One increasingly prominent tool in their arsenal could be the Collateralised Loan Obligation (CLO)—a structured investment vehicle offering exposure to the leveraged loan market.

What are CLOs and why do they matter?

CLOs are actively managed portfolios of senior secured leveraged loans, packaged into tranches that distribute cash flows to investors based on a predefined structure. The CLO market has grown rapidly and is now a $1.3 trillion market having almost doubled in the last five years.

Global CLO market: Market size has continued to grow

Source: BofA Global Research, Intex through 30 Jun 2025

[This chart shows the US CLOs and European CLOs markets between June 2005 and June 2025]

These vehicles are designed to capture the spread between the interest earned on the underlying loans and the interest paid to investors—creating potential for attractive returns.

Unlike traditional fixed income instruments, CLOs offer:

  • Access to a resilient asset class: Leveraged loans have historically shown strong performance, especially in rising rate environments.
  • Active portfolio management: CLO managers dynamically adjust holdings to respond to market shifts.
  • Customisable risk exposure: Investors can select tranches that align with their risk-return preferences.

How CLOs work

A CLO begins with a pool of 200–400 unique borrowers, typically companies involved in M&A or private equity-backed transactions. These loans are bundled into a special purpose vehicle (SPV) and sold in tranches—from AAA-rated debt to equity.

The cash flow waterfall ensures that payments flow first to senior tranches, then to junior tranches, and finally to equity holders. This structure allows CLOs to offer differentiated risk profiles and potential for enhanced yield.

Key considerations for investors

While we believe CLOs offer compelling benefits, they also come with complexities:

  • Credit risk: The performance depends on the credit quality of underlying loans.
  • Liquidity risk: Some tranches may be harder to trade in stressed markets.
  • Interest rate sensitivity: Floating-rate loans can benefit from rising rates but also introduce volatility.

CLOs are best suited for professional and sophisticated investors who can assess these risks and understand the nuances of structured credit.

Conclusion

CLOs offer a distinctive investment opportunity by providing access to the leveraged loan market. With active management and structured cash flow distribution, we believe CLOs can be an attractive option for sophisticated investors looking to diversify their portfolios and achieve appealing returns. As with any investment, it is crucial for investors to conduct thorough due diligence and understand the associated risks before investing in CLOs.

For more detailed information, please refer to Understanding CLOs in Today’s Dynamic Financial Landscape.

Want to learn more? View our video about AAA-rated CLOs. 

Related products

These Funds are only suitable for professional and advanced private investors. For further details, please consult the Fund supplements.

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  • Investment risks

    For complete information on risks, refer to the legal documents.

    The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    The creditworthiness of the debt the Fund is exposed to may weaken and result in fluctuations in the value of the Fund. There is no guarantee the issuers of debt will repay the interest and capital on the redemption date. The risk is higher when the Fund is exposed to high yield debt securities.

    Changes in interest rates will result in fluctuations in the value of the Fund.

    It may be difficult for the Fund to buy or sell certain instruments in stressed market conditions. Consequently, the price obtained when selling such instruments may be lower than under normal market conditions.

    Highly rated tranches of CLO Debt Securities may be downgraded, and in stressed market environments even highly rated tranches of CLO Debt Securities may experience losses due to defaults in the underlying loan collateral, the disappearance of the subordinated/equity tranches, market anticipation of defaults, as well as negative market sentiment with respect to CLO securities as an asset class.

    Important information

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    Views and opinions are based on current market conditions and are subject to change.

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