Private credit Why CLO Equities - Risk assessment and management

Ian Gilbertson
Jeffrey Reemer
and
February 10, 2026

Transcript

Jeff Reemer

Ian, given the embedded leverage in CLO equity, how do you manage downside risk, especially in stressed credit environments?

Ian Gilbertson

It's important to acknowledge that the equity tranche is the first to absorb losses from the loan portfolio and ranks behind debt tranches in the cash flow waterfall. So, this makes minimizing credit loss incredibly important for CLO equity investors. At Invesco, we emphasize the importance of the collateral manager's role in driving overall returns.

Unlike some other structured products, CLOs have a reinvestment period where the collateral manager is actively managing the collateral pool. The manager's credit process is vital to generating positive outcomes. So what may seem counterintuitive is not all risk is bad risk for CLO equity investors. CLO equity is effectively long volatility with investors able to capitalize on market dislocations by locking in these higher spreads in periods of stress and distress.

Given the structural leverage and evolving credit conditions, thoughtful downside risk management remains an important consideration for CLO equity investors. As the first tranche in the cash flow waterfall, CLO equity can benefit from a deliberate and well‑informed approach to credit risk oversight. This discussion highlights the valuable role of the collateral manager during the CLO’s reinvestment period, illustrating how active portfolio management and a disciplined credit process can support resilience and enhance return potential.

It also explores how CLO equity investors may benefit from periods of market volatility—leveraging dislocations to capture higher spreads and transform moments of stress into potentially compelling opportunities.

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