With about $30 billion in issuance so far this year, alts heavyweights have muscled into the CLO space to meet booming demand as spreads across corporate bond markets shrink.
Bonds backed by private credit loans are now among the hottest financial products on Wall Street with heavyweight firms like Blackstone, Apollo Global Management and Golub Capital selling them at the fastest pace on record.
The securities, known as collateralized loan obligations, are taking up an ever larger part of the $1.7 trillion private credit market. While most CLOs are backed by loans that banks give companies, known as broadly syndicated loans, private credit firms have muscled into the space with the loans they give smaller firms also being securitized and sold.
Firms like Blackstone are increasingly bundling their private credit debt into CLOs — which offer some of the industry’s highest returns — to meet booming investor demand as spreads shrink across corporate bond markets. As a result, buyers of private credit CLOs are now getting less compensation than they have in the past to own risky securities that are more complex, relatively illiquid and less transparent than traditional CLOs. Hovering at about 20 to 25 basis points, the extra yield that private credit CLOs offer over traditional CLOs is at historic lows, according to Bank of America Corp.
Learn more: Private credit and CLO investing
So far about $30 billion of private credit CLOs have been sold in 2025, with issuance already outpacing last year’s volume at this same time, and on track to hit an all-time high of $50 billion by year-end, according to BofA. That would beat last year’s record by more than a quarter.
Over the next two to three years, BofA expects private credit CLOs to make up a 25% chunk of the overall private credit market, from 18% in 2024.
“Private credit CLOs are surging because private credit is surging,” said Seth Painter, head of capital solutions at Antares Capital, which reset a $1.5 billion middle-market CLO last Friday. “Certain investors are seeking higher, levered returns and there’s no better funding structure to achieve that than a CLO.”
CLOs offer an alternative to the high-grade and high-yield corporate bond markets. They bundle leveraged loans into bonds of varying risk and reward, which are then sold, giving investors exposure to the vast, dynamic market for floating-rate corporate debt.
Some of the biggest names in finance are active players in the growing private credit CLO space. Bain Capital priced a deal on Monday while Ares upsized and priced a deal earlier this month, joining the likes of Blue Owl and Deerpath. Others like Carlyle, HIG Capital and Churchill Asset Management priced deals in August, while Blackstone and AllianceBernstein priced deals in July.
“Managers are no longer sitting in meetings doing private credit 101 lessons,” said Victoria Chant, global head of capital markets and bank relations at Blackstone Credit & Insurance. “You’ve got more diverse portfolios, and you’re building diverse portfolios faster than before because of the proliferation of origination in private credit.”
First-time CLO managers are also entering the space, including Apollo Debt Solutions BDC which priced its first such offering in April and followed up with a $702 million deal last week. Morgan Stanley Direct Lending Fund and Kohlberg & Co. LLC also debuted deals this year, while Ares debuted last year.
“Up until three years ago, there were only a few managers that could create these portfolios,” said Chant. “Now, more can make CLO-friendly portfolios.”
It isn’t just the size of the market that’s growing — the transactions are too.
The three biggest new deals this year have been from HPS Corporate Lending Fund, Golub and Blue Owl, each more than $1 billion in size. That’s because as the market evolves, CLO managers are better able to gather more loans for their portfolios across various industries to create a uniform CLO product.
“The market has become intelligent faster than expected,” said Chant. “There’s broad understanding of the structural differences in the assets versus BSLs. What I see happening in the market reflects a far deeper understanding of the underwriting process.”
The trend has spread across the Atlantic, too. Barings registered its second European middle-market CLO in late July, eight months after launching the region’s first. Ares priced its first European private credit CLO in June, and registered the warehouse for its second in July.
Shrinking spreads
Private credit CLOs are viewed as compelling investments as spreads between them and their plain-vanilla BSL counterparts have tightened to historic lows – as little as 21 basis points in the AAA tier, according to BofA data as of Sept. 12. The narrowing signals that there’s less of a penalty to pursue riskier private credit CLOs now.
“The private credit CLO market has seen an increase in the investor base which explains why the basis has compressed,” said Pratik Gupta, who leads BofA’s CLO research. “Given the nature of its performance and investor appetite for private credit, that basis is here to stay.”
Deerpath, for instance, priced the AAA tranche of a $654 million CLO earlier this month at about 155 basis points over a floating-rate benchmark, compared to 205 basis points on the same tranche of its last new deal in March 2024.
But while the gap between yields on private credit and BSL CLOs has tightened, the former still offers much higher yields. Blackstone’s reinvesting private credit CLOs have weighted average spreads of around 503 basis points among their portfolios, compared with 319 across its reinvesting BSL CLOs, a Sept. 16 Barclays Plc survey shows.
Growing demand
Unlike BSL CLOs, which bundle pieces of very large loans, private credit CLOs package smaller chunks of debt given to companies with more modest revenues. As these smaller loans typically don’t receive credit ratings, and don’t really trade in the secondary market, investors who buy private credit CLOs have less liquidity and transparency but also benefit from higher risk premiums.
These nuances are what fuel the divergence in investor bases. Buyers seeking traditional, liquid exposure may be inclined toward BSL CLOs, while investors chasing yield and diversification may opt for private credit CLOs.
Private credit CLOs also offer investors more credit protection than traditional peers, as they benefit from tighter portfolio constraints around riskier assets like second-lien or payment-in-kind debt. Even so, some market-watchers are still cautious.
“PIK and interest deferral are the canaries in the coal mine,” according to Ian Gilbertson, co-head of US CLOs at Invesco Ltd. “The way the direct lending ecosystem is set up — where collateral managers are originators working closely with sponsors and businesses — it feels natural to have higher PIK-ing through the cycle,” he said, referring to the tool that direct lenders can use to help firms work through liquidity issues.
In the US, CLO PIK rates are climbing, according to Barclays, which estimates the percent of BB tranches by count that are PIK-ing is 1.23%, up on the year after bottoming at 0.72% in December. “We aren’t worried, but it will still be nice if rate cuts could help bring PIKs back down,” the bank noted on Sept. 22.
As the Federal Reserve embarks on its rate-cutting cycle — with a cut last week and two more expected this year — the moves may be slightly negative for CLO demand, according to Barclays strategists Gavin Zhu and Corry Short. Cuts will likely be neutral for spreads and supply though, and positive for fundamentals and CLO equity, they wrote in a Sept. 17 note.
“If you look towards the future, there will be more participants in the private credit CLO market,” said Gilbertson. “If you have growth from platforms that have raised money and give them the time to originate, once those books of business scale, you’re going to see more inaugural issuance from the names you’re familiar with.”