While it appears that deal flow is taking a pause in the private credit arena given headlines and market dynamics, pockets of activity do exist, and frustrated LPs may be turning to the non-sponsored market to find alpha.

To be sure, in the competitive sponsor-backed market, spreads have become increasingly tight and now are normalizing in the S+500-525 area, according to market sources. What’s more, oversaturation in some sectors has also given investors pause, leading them to look for new avenues of opportunity.

“The LP community is disappointed that core lending in their books has underperformed and that they’re overexposed to software and SaaS,” said Mustafa Humayun, partner and portfolio manager at Sagard Credit Partners. “They are frustrated and are looking for alpha in credit.”

Cue the non-sponsored market, which is historically not as competitive as the sponsor-backed market.

As such, those types of deals are hard to find, which may be why there’s more upside, sources say.

“The non-sponsored market is a less crowded game,” said Andrew Korz, senior vice president, investment research at Future Standard. “You’re not relying on PE sponsors to do the underwriting. From an asset manager perspective it can be more resource-intensive, but that can potentially lead to higher returns.”

Non-sponsored deals may be more complex, but as a result they can come with greater lender protections, such as personal guarantees from the company founder or owner, according to Korz. “Generally speaking, covenants tend to be more bespoke in non-sponsored transactions,” he said.

Many of the deals in non-sponsored market are founder- and family-owned and the retiring, and aging baby boomer generation is part of the reason there may be more deals coming to market currently, as those businesses are being put up for sale.

As well, many of the types of businesses that are entrepreneur-founded are “old school,” such as manufacturing, business services and consumer products, and therefore are not cyclical or subject to other broader market setbacks.

Yet, there are some trade-offs.

You don’t have the sponsor to make sure things are going well so it’s all hands on deck if things go wrong, Korz noted. “You’ve got to get in there to maximize the value of the loan,” he said.

Another pain point is the length of time it can take for deals to get done. “It may take three to five months to put together a transaction and close, whereas in the sponsor world it may take only a week or two,” said Sagard’s Humayun. “Lenders to non-sponsored companies have to earn their spread,” he said.

While pricing is determined on a case-by-case basis, the non-sponsored market typically comes with anywhere from 100bps to 300bps of extra spread to the sponsored market.

“It’s negotiated,” said Humayun. “Sometimes the spread comes in excess coupon or OID, or through heavy prepayment premiums.”

Krista Giovacco
krista.giovacco@levfininsights.com
+1 917 757 6399

CLO managers are facing the worst new-issue economics in years, with BSL new-issue volume down 21% year over year. Thin leveraged loan supply, compressed spreads and high liability costs are keeping day one equity returns deep in the red, but the market is deploying a suite of countermoves to keep deals crossing the line. Captive CLO equity continues to drive most issuance, but as managers get creative third-party equity investors are starting to find opportunities.

CLO Triple A spreads continue to edge down and are pricing at an average of 121bps currently, according to LFI data. But as leveraged loan spreads are also compressing modeled equity returns remain stuck in the low-double-digit IRR range, according to sources. CLO equity returned negative 10% for day one arb and 11% IRR year to date through mid-May, according to BofA Global Research, which gives investors significant pause on new commitments.

“Equity has often been the limiter for growth of the CLO market; it’s now about access to loans,” explained Alex Danehy, head of US CLOs at Deutsche Bank. “The asset class can’t continue to print record issuance numbers over the long term, which would ultimately result in underperformance.”

Countermoves

Captive CLO equity continues to dominate the market, but investors are finding opportunities deal by deal. To attract first loss buyers, managers can pull several levers, said sources. The most common is a side letter that redirects roughly 5bps to 10bps of the management fee to the equity investor. Another option is a fee holiday, where the manager waives fees from closing to the first payment date. Those savings flow directly into the first equity distribution, the most important for IRR calculations.

Some managers also offer first payment guarantees, effectively collateralizing support against their fees to ensure a minimum initial payout. “The amounts stay modest, but the gesture shows alignment,” said a buysider.

While not purely a countermove, a handful of print-and-sprint CLOs pop up once in a blue moon, and this can result in a windfall for a manager and investors. In March, after the Iran war started, loans traded off roughly a dollar, a handful of attractive print-and-sprint deals emerged from opportunistic managers. Those managers with empty warehouses took advantage and built par, which made the deals more compelling for third-party equity buyers.

12% is the new 15%

The other thing the market is doing to keep deal flow going is recalibrating return expectations. Where equity buyers once demanded 15%-plus IRRs, sources say 11%-13% is now the more common range, given the challenging spread compression on the asset side. With portfolio spreads around 300bps or tighter, it is said to be very hard to think about generating returns north of 15%. “As long as LPs are aware that this is the new regime of spread targets, then the CLO equity machine will continue,” said a banker. “Marketing has become more realistic in this cycle, reflecting that credit is at historic tights across the spectrum.”

While 12% may be the new target, even that reduced level is a push for many managers. A CLO executive explained that getting low-double-digit returns largely depends on manager tier and negotiations: “It really depends on the assumptions used, but equity returns are hard to push into double digits at current creation prices with a mostly secondary ramped de novo portfolio and a low tier-two or less liquid shelf WACC, though low teens returns remain achievable with current tier-one WACC, favorable portfolio costs, resets and subsidies.”

The situation does seem to be improving. According to one banker, recent Triple A tightening has helped pushed modeled returns toward 13.5% in mid-May in some cases, a swing from below 10% just at the start of the month. That could reopen the market to sidelined equity buyers, although some LP buyers, such as pensions and endowments, are said to remain active.

One large CLO ETF fund sees a potential bull case for large, liquid Triple As tightening to 110bps (a level last seen in February 2025) as lower issuance compresses spreads, a floor that could materially improve equity profiles. Other CLO executives say Triple As need to compress even further to the low 100s to significantly motivate third party equity buyers.

Retail capital hunt

CLO equity fundraising is also moving cautiously toward a more balanced mix of institutional and retail demand. Interval funds mixing equity and junior mezz are emerging as the vehicle of choice for that, though most stay small and do not yet drive the market independently, said sources. The open question is whether retail investors will tolerate the liquidity constraints that come with these products, particularly after negative headlines around BDCs. How private credit funds handles that issue will shape the next phase for CLOs also. One skeptic for retail as an outlet for CLO equity said the 10-20 points performance variance between CLO managers makes locked in capital extremely difficult for the asset class, as opposed to a diversified strategy with small positions.

Multiple managers are building interval funds now. Early this month, MetLife’s PineBridge launched an interval fund , joining VanEck in a push to broaden its investor base beyond institutional allocators. The VanEck CLO Opportunities Fund (CLOIX) is an actively managed CLO investment strategy that invests primarily in equity and junior mezzanine tranches of CLOs of BSLs. “There is interest in interval funds and private wealth distribution as additional sources of demand for CLO equity and related products,” said a CLO tranche trader.

Minority stakes

One dealer reported that half its pipeline involves third-party equity as minority investors. Captive vehicles only need to buy 51% themselves, so they look to place the rest elsewhere, sources said. A few buyers take majority pieces in new-issue deals, but that remains the exception. Roughly one buyer is visible to do true primary majority equity pieces, sources said. Managers have a long-term reason to accommodate outside capital. If they eventually need liquidity on a control position inside a captive vehicle, it helps to have investors who already know the platform and the portfolios. That depth supports future growth.

For control equity, tranche investors say the math doesn’t work, e.g., Triple As would need to reach low 100s to attract interest, said one credit hedge fund CLO tranche trader.

Discerning captive equity

Captive CLO equity continues to support the majority of new deals, but the volume is slowing, said sources. Bain and CVC renewed their captive programs, yet several small and midsize platforms are struggling. One deal lawyer noted some $300mn-$400mn captive raises have seen “diminished” LP interest. “No investor wants to reward low performance,” said sources. “Size matters — large platforms have the advantage of substantial workout teams.”

Performance will determine whether investors back a second fund. Some managers have navigated the environment well; e.g., maybe they missed First Brands but handled software well. Others landed on the wrong side of both those issues and now underperform. That sentiment also holds true for deep-pocketed parents: “No parent company keeps putting good money after bad indefinitely,” sources said.

Many of these captive equity funds carry four-year lives and are sitting roughly two and a half years in, so time remains. But eventually, if follow-on support fades, overall issuance will slow sharply as these unnatural buyers disappear, unless the arbitrage improves, or structures change enough to produce returns that work for third-party equity.

Given the headwinds for captive equity fundraising, cross-platform partnerships are emerging as another important source of equity support to grow a CLO business, said sources. Equity partnerships can help managers address “exit velocity,” which is a challenge, particularly for newer managers that are running out of initial investment funds.

Looking ahead

Investors and bankers expect the modest thaw in May to continue into June, but issuance is likely to remain below trend absent a surge in M&A-driven loan supply or rate cuts. Still, hope remains. The market appears spring-loaded: Natural cash buyers — pensions, endowments, and non-life insurers — continue growing CLO exposure and reviewing deals closely, positioning the market for a snap-back if the arbitrage normalizes.

David Graubard
david.graubard@levfininsights.com
+1 646 361 6095

Investment firm SIGNAL focuses on opportunistic credit and special situations across private and public markets in Europe. Co-founder and CIO Elad Shraga spoke to LFI about the degradation of underwriting standards in the private credit space, default rates, and why he is more positive on AI challenging software business models than the rest of the market.

LFI: Given the crises the global economy has been facing, why haven’t we seen an increase in distressed and stressed debt financing over the last few years?

Shraga: Underwriting standards in direct lending have materially shifted over the past three to four years, reflecting a “natural” evolution as the market adapted to changing conditions. After the challenges of early 2022, the sector delivered a strong three-year run, which reduced investor focus on a potential distress cycle and led fund managers to stop actively seeking stressed and distressed opportunities – resulting in limited allocations to that segment…

Sub-investment grade tranches of European CLOs have widened in secondary to levels last seen during the spread blow-out that followed April 2025’s Liberation Day.

Average secondary spreads for Single B tranches topped 1000bps DM at the close of last week, and Double Bs approached 700bps DM, per Houlihan Lokey’s CLO spread indices, which track the most liquid bonds in each rating group.

Behind these averages is a significant dispersion between individual deals, which has reached record levels at the bottom of the stack.

Ranges currently span 950-1250bps for deals without distressed Market Value OCs (MVOCs), but go all the way out to 1400bps for deals under more significant pressure, or trade solely on cash prices, say sources.

The MVOC measures the cushion of collateral value available to support debt tranches, should a deal be liquidated.

Trading on MVOC

Much of the deal-level dispersion in Single B tranches stems from portfolio exposures to software companies, whose loan prices have slumped this year on fears of AI disruption.

CLO portfolio allocations to software vary significantly by manager, from close to zero to the high teens, with an average of approximately 7% in Europe.

“CLO portfolios with software exposure at the upper end of the range face greater pressure on their MVOC ratios, which directly impacts tranche pricing in secondary,” said Rondeep Barua, portfolio manager in the Alternative Credit team at Ninety One. “Depending on how a manager has navigated other recent market events, some deals may also be subject to a manager-specific premium.”

CLO managers across Europe have taken differing approaches to AI disruption risk and software. A panelist at this week’s FT Live CLO conference in London commented that some managers opted to “sell first and ask questions later”. Others say they have selectively added exposure to discounted names that they think were oversold.

Other challenged sectors, such as chemicals, plus idiosyncratic problem credits such as First Brands, have further weakened market MVOC levels in late 2025 and early 2026. The emerging energy crisis stemming from the Middle East war is adding another layer of uncertainty.

As a result, an increasing number of CLO Single Bs are now heading into negative MVOC territory. Recent BofA  indicates that approximately 15% of European CLOs now have negative MVOCs, up from 3% in January and almost none in 2025. A “handful” of Euro CLO Double B tranches also have MVOC ratios below 100%.

While a negative MVOC increases that tranche’s price volatility – and even tradeability – it does not indicate an imminent loss for bondholders. Loan prices can recover, and CLO structures contain various cash trap mechanisms designed to protect bondholders.

On this point, the technology segment of the JP Morgan European Leveraged Loan Index has lost 4.86% year-to-date – but so far in March it has gained 1.49% in a partial retracing of its steps.

IG more resilient

Unlike the post-Liberation Day response – in which all tranches across the CLO capital structure widened in a knee-jerk reaction to broad market shock – the latest repricing of risk has been more concentrated in CLOs’ lowest rated tranches.

Triple As, for example, have widened to ~108bps DM on average, compared with wides of ~142bps in April 2025, according to Houlihan Lokey data, while Triple Bs have moved to ~315bps DM now versus 395bps last April.

See also: 

Anna Carlisle
anna.carlisle@levfininsights.com
+44 (0)20 7469 0981

Sentiment at the 2026 JP Morgan Global Leveraged Finance Conference was surprisingly positive across many asset classes, and CLOs were no exception. While the ongoing issues with the software sector were a constant feature of discussions, so were the opportunities that lower loan prices could present, especially for CLO equity investors.

The packed conference, which took place in Miami from March 2-4, included a number of CLO panels among the issuer presentations and macro discussions, all dominated by software, the loan sell-off, and what both trends will mean for CLO liabilities in the secondary and primary markets.

“Software continues to be a theme in every conversation, but the message is getting out that CLO market participants shouldn’t use a broad brush to paint the entire software industry the same,” noted Steve Baker, Global Head of CLO Primary at JP Morgan, “The story is much more nuanced across CLO portfolios and there are many strong businesses that can excel with the advancements in AI.”

The market seems to agree with that, with new-issue BSL CLOs currently pushing ahead despite the choppy conditions, albeit pricing at wider levels. Three deals priced this week, with weighted average Triple A at 117-123bps (but note that these are often locked in weeks before the deal prices). CVC achieved the tightest Triple A execution so far this week with senior Triple As at 116bps (117 weighted average).

Looking at the pipeline, a large, liquid manager expects to price Triple As at 116 bps in the coming days, according to sources, but is talked with an OID of 0.5pt on its Triple B notes and 2pts on Double B notes. A newer manager saw its Triple A jump to 125bps Wednesday from 117bps Monday in pre-marketing, then improve to talk of 124bps Thursday morning, said sources, highlighting the current volatility.

The potential downside risk of software was highlighted across the panels, but so were the positive changes that the sell-off in loans could represent. One CLO manager said they had already repositioned their portfolios to be more nimble so they can take advantage of any relative value opportunities. And at least one large manager is said to be pre-marketing a print-and-sprint deal.

The change in market dynamics is especially impactful for investors in primary equity. According to Kris Pritchett, a Partner and Portfolio Manager at Ares, “CLO equity has had a rough couple of years, but today it is starting to look interesting again. You can now build a portfolio of loans considerably below par, while liability costs are close to multiyear tights.”

It isn’t just the day one arb that’s benefiting from the shift in market dynamics, but also longer-term return projections. “We’re starting to see some signs of life, with Triple As in the 122-123bps area.” noted Mike Nespola, senior portfolio manager and head of US CLO portfolio management at CIFC, “We can now model in flat loan spreads, maybe even some future widening, which also helps projected equity returns.”

The impact on existing CLOs is more nuanced, especially in the lower mezz. “The average CLO exposure to software is 15%, so it’s a widely held sector,” said Steve Page, a managing director at Barings. “Some analysts are suggesting a third of software names could default. But even if that happens, and even if the recovery is zero, most Double Bs are going to be able to withstand that. There is downside protection within the structure, but it doesn’t mean spreads aren’t going to go wider.”

Another investor pointed to CLO Double Bs in the secondary market as being a potentially interesting trade as they start to reach the low-90s, albeit one with a definite credit risk.

Secondary equity is an even more challenging place, but as one investor reminded their audience, part of the problem there lies in the widespread adoption of MVOC as a shorthand for equity valuation. Absent a default or LME, loans remain a par value product, and looking at secondary equity through that lens can give a very different valuation than MVOC.

Tom Davidson
thomas.davidson@levfininsights.com
+1 646 943 6231