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.
We are a leading, long-tenured private credit manager, using a conservative credit process to pursue opportunities across syndicated loans, direct lending, distressed debt, and special situations.
CLO equity offers institutional investors the potential for competitive income, diversification, and growth, enhancing portfolios beyond traditional fixed income and private equity.
Explore how CLO equity can deliver stable returns in a declining rate environment through active credit selection and expert management.
CLO equity stress tests show strong returns even in stress, aided by widening spreads, low financing costs, and refinancing benefits.
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All data sourced to Invesco unless otherwise indicated. As of September 30, 2025.
Investment risks
Investments in private credit and private debt—including leveraged loans, middle market loans, mezzanine debt, and second liens—are speculative and involve significant risks. These securities are generally illiquid, lack a secondary market, and may need to be held to maturity, which can result in liquidity constraints and difficulty exiting positions. Borrowers often have high leverage, increasing default risk, particularly in adverse economic or interest rate environments. Competitive pressures and excess capital may lead to weaker underwriting standards, raising credit risk and reducing potential recoveries. Private market investments also carry risks related to limited transparency, higher fees and expenses, longer investment horizons, and regulatory considerations. Additionally, these securities may be sold or redeemed at values different from the original investment amount and are considered to have speculative characteristics similar to high-yield securities. Issuers are more vulnerable to changes in economic conditions than higher-grade issuers, and investors may face liquidity strain from capital calls during periods of market stress. These factors can materially impact investment performance and principal value.
Structured finance securities such as Collateralized Loan Obligations (CLOs) entail a variety of unique risks. The performance of a CLO is affected by a variety of factors, including its priority in the capital structure of the issuer thereof, the availability of any credit enhancement, the level and timing of payments and recoveries on and the characteristics of the underlying receivables, loans or other assets that are being securitized, remoteness of those assets from the originator or transferor, the adequacy of and ability to realize upon any related collateral and the capability of the servicer of the securitized assets. 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.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. This should not be considered a recommendation to purchase any investment product. This does not constitute a recommendation of any investment strategy for a particular investor. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. Please obtain and review all financial material carefully before investing.
United States
Issued in the US by Invesco Senior Secured Management, Inc., 225 Liberty Street, New York, NY10281, USA. Invesco Senior Secured Management, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities.
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