Guide to CLOs

4. How are CLOs Managed

Behind almost every CLO sits a company known as the portfolio manager, the collateral manager or simply the manager. For actively managed CLOs (which is to say, most of them), the manager is the key institution driving the deal.

Meet the manager

Managers may be small, standalone firms or they may be large insurance companies, loan managers or hedge fund managers. Most often, the team of people involved in managing the CLO will be small. There is usually a core team of portfolio managers, typically no more than two or three people. They will be supported by a handful of research analysts, compliance specialists and marketing staff. Those resources will usually be shared across other investment products and the small team of portfolio managers will usually manage (or aspire to manage) a suite of several CLOs. The same team will often also manage assets for other related products such as loan mutual funds or separate accounts.

To avoid confusion, we will refer here to the management firm as the manager and to the individual decision-makers as portfolio managers.

How many deals?

The size of the CLO market and the number of CLO managers has grown considerably since the advent of the 2.0 market. In 2013, 130 CLO managers held $397.27 billion AUM across 913 CLOs. As of the end of 2020 162 CLO managers had $931.12 billion of CLOs under management representing 1907 CLOs globally.
Although new entrants regularly join the CLO management industry, the market has also seen consolidation as firms exit the business and sell contracts to other managers, and the largest players in the business continue to expand. The top 20 largest managers now look after an average of 39 deals each, with the largest, Blackstone, boasting 65 CLOs under management.

US CLO managers are becoming increasingly global in their outlook. 36% of US broadly-syndicated loan managers also manage mid-market or European CLOs. 16 of the top 20 largest managers own both US and European CLOs.

Although some CLO managers specialise in CLO management, many have now diversified into bond-flex CLOs and CLO funds. For many others CLOs are a portion of their investment mandates in credit, and they also manage assets in SMAs, comingled funds and direct lending.

The manager’s role

The manager’s role usually consists of the following:
Choosing and buying the initial assets to go into the CLO portfolio.
Deciding when to sell assets which it fears are likely to default.
Monitoring the credit quality of the loans in the portfolio by keeping up-to-date with statements released by the issuers, news reported in the media and any other information available.
Monitoring the market value of the loans in the portfolio, especially by talking to brokers and dealers in those loans.
Deciding when to sell assets which have appreciated in value from their purchase price (thereby improving the par value of the portfolio).
Finding new assets to buy with the proceeds of a sale or with the money it receives when an issuer pays back its loans early.

Ramping the deal

A crucial part of the manager’s job is putting in place the best initial portfolio for the CLO. The initial stage of a CLO’s life between the warehousing phase or closing date and the effective date is known as the ramp-up (see chapter 3: How does it happen?).
Once the deal has closed, the CLO starts to accrue interest on all its notes. However, most deals do not have a full portfolio of assets on closing. This creates a negative carry – a shortfall between the amount of interest coming into the deal and the amount being paid out. Therefore, the manager has an incentive to build the portfolio as quickly as possible in order to eliminate this drag.
However, building the portfolio quickly may be at odds with building a good portfolio (one with diversity and a healthy level of income relative to the credit risk of the loans).
Therefore, between the closing date and effective date, the manager will usually work to optimise the mix of assets in the portfolio. For example, it may start by buying relatively large chunks of loans in the primary loan market, and then trade these for smaller positions in the secondary market, in order to build a more diverse and higher yielding portfolio.


CLO managers, through their individual owners or through their other managed funds, may also be investors in CLOs. In many cases, managers also have an investment management business which buys CLOs from a variety of managers. In other cases, the manager will invest exclusively in its own CLOs.
For investors, manager co-investment in a CLO is usually regarded as a good thing. Especially where key people at the firm have their own personal money tied into a deal, it usually ensures that the manager takes decisions in the interests of investors. Of course, not all investors’ interests are the same. In particular, debt and equity investors often have diverging interests. Although it can happen that a manager will invest in the debt tranches of one of its CLOs, usually CLO managers invest only in equity tranches.
Manager co-investment can also help a CLO to be compliant with European risk retention rules (see chapter 12: CLOs and regulation).

Styles of management

Some CLO managers make frequent purchases and sales, some buy and sell infrequently. Some managers specialise in finding obscure loans and other assets while others stick to widely held and relatively liquid loans. Some managers buy loans exclusively in the primary market, while others make heavy use of the secondary loan market. All these factors are part of a manager’s investment style.
Size and style are often closely related. A large manager will need to buy more assets across its various funds and CLOs than a small manager. Therefore it will need to buy larger loans on average to achieve that scale. A smaller manager can choose not to buy these large loans if it feels they are overpriced. On the other hand, the greater buying power of a large manager should mean that it is able to get large allocations to the loans it prefers, and it may be able to buy the loans at more favourable prices.

All about performance

A manager’s investment style and its trading decisions – which assets to buy, which not to buy and which to sell – have a large effect on the performance of a CLO. So, too, do the manager’s ability to get hold of the assets it wants to buy (often referred to as sourcing), and its ability to buy and sell at attractive prices (known as execution).
However, they are not the only factors that determine the performance of a CLO. Perhaps the most important is timing. Some of the most successful CLOs ever have been those that were able to buy assets cheaply when loan prices were depressed, reaping the advantage when those loans went on to perform better than expected. Another factor affecting performance is the rules under which a CLO was set up. A deal prohibited from buying certain types of assets may underperform its more flexible peers. On the other hand, if investors insist that a CLO shun certain assets that turn out to be bad investments, their deal will benefit.

Static deals

Not every CLO has a CLO manager. Some CLOs, especially those issued by banks as part of a balance sheet management strategy, have static portfolios.
However, this guide focuses mainly on the majority of CLOs where some degree of trading within the portfolio is permitted and where a company is paid to carry out the role of manager.

Mergers and acquisitions

Like in any industry, companies involved in CLO management sometimes seek to grow by acquisition and merger, and sometimes their owners decide to sell the business they have built.
There is, therefore, a market for CLO management firms. The years immediately following the financial crisis saw a large number of M&A deals.
There is also a market for the right to manage deals and the fee stream that comes with it. Therefore, firms have, on occasion, traded individual CLOs or sets of CLOs. An example is the sale by several US managers of their European CLOs post-crisis in order to concentrate on their domestic business.

Naming the key individuals

Often, investors buy a CLO based on the track record or credibility of its individual portfolio managers. The biographies and credentials of the portfolio managers are trumpeted in every CLO pitch book. Some investors, concerned that these critical individuals could leave their jobs during the life of the CLO, have insisted on the inclusion of key person provisions. They can, in some cases, give investors the right to sack the manager and install another firm of their choosing (a replacement manager) if the key individuals quit the firm.
Not surprisingly, asset management firms do not like to include provisions which could see them lose the right to manage a deal. However, the individual portfolio managers concerned will normally welcome the extra bargaining power this provides over their employer.

Getting paid for the job

A CLO manager will usually receive three different kinds of fee for managing a CLO. These are usually referred to as the senior fee or base fee, the junior fee or subordinated fee and the performance fee or incentive fee.
The senior fee is a fee that the manager will receive regardless of the performance of the deal. It is paid out ahead of most other payment commitments in the CLO’s interest waterfall (see chapter 5: Understanding the cashflows). Typically, the senior fee is around 15 basis points a year (0.15% a year of the CLO’s total assets). The idea of the senior fee is that the manager receives enough money to be able to carry out its management duties, even if the CLO performs poorly.
While the senior fee comes out of the interest waterfall ahead of debt interest payments, the junior fee is paid only if there is enough money for the CLO to pay its coupon on all the CLO notes. Usually, the junior fee is the last item the CLO pays before distributing money to the equity investors. The junior fee is usually bigger than the senior fee – typically between 30-35 basis points a year. It ensures a healthy stream of income for the manager of a CLO that is performing at least well enough to meet all of its commitments.
The third kind of management fee is linked directly to the returns received by equity investors. Usually, once a CLO reaches a certain hurdle rate of return for its equity investors, all equity distributions above that point are split, with the manager typically keeping 20% while equity investors receive 80%. This incentive fee can be by far the largest part of a manager’s income from a CLO, but it is not uncommon for the performance fee to be zero because the CLO fails to achieve the hurdle rate of performance.

Advisors and sub-advisors

Most CLOs have only one manager. But some have two. There have even been rare instances of CLOs with several managers.
Where there are two managers, there is usually a main manager and sub-advisor. Although it might be thought that the sub-advisor plays a subsidiary role, this is often not the case. One of the most important reasons that sub-advisors have been appointed on CLOs in recent years is where the original manager has decided to sell its right to manage a CLO (see mergers and acquisitions, above).
In some cases, the selling manager cannot gain investor approval to transfer its management contract. So, instead, it remains as the legal manager of the CLO, with the acquiring manager taking on the sub-advisory role. In these instances, the sub-advisor becomes, in all practical senses, the manager of the deal and receives the greater part of the CLO management fees.
Pinch to zoom in

Changing the manager

Although the manager is the driving force of the CLO in practice, in legal terms it is simply an adviser to the special purpose vehicle. And all CLOs include provisions to allow investors to change the manager – also known as manager removal or manager replacement language.
Manager removal clauses vary considerably from deal to deal. Managers are free to resign from their roles. But the right to choose a successor may be held by equity investors or it may be that all classes of investors need to approve the new manager. Alternatively, the successor manager may need to be approved by only equity investors and the controlling class of investors.
Another important subtlety is that some CLOs allow for the approval of a replacement manager by deemed consent while others require an active vote by investors. Deemed consent means that investors who do not exercise their right to vote are deemed to have approved the proposal. This makes it easier for those proposing the new manager (perhaps the outgoing manager and equity investors) to secure approval for their plans.
Managers can also be sacked against their will. Most CLOs allow some combination of investors to remove a manager either “for cause” or “without cause”.
Typically, the controlling class of investors can vote to remove the manager for cause. But this can usually happen only in a few narrowly defined circumstances, such as:
  • Bankruptcy of the manager
  • Breach of the collateral management agreement
  • The manager commits fraud
Alternatively, the manager can also be removed without cause, perhaps because investors are simply unhappy with the way the CLO is being managed. But, this typically requires a high proportion, such as 75% of each class of note holders, to vote in favour of removal.