CLOs: A runway for innovation
Collateralised loan obligations (CLOs) are entering 2026 with structural tailwinds driven by innovation and evolving investor demand.
On the innovation front, European middle market CLOs – virtually nonexistent two years ago – are now gaining traction, with reinvesting and multicurrency structures adding complexity and opportunity. For investors, middle market CLOs offer exposure to less trafficked credits with potentially higher spreads, while maintaining the structural protections of the CLO format.
Infrastructure CLOs are another frontier, reflecting surging demand for capital tied to, among other areas, data centers, energy grids, and transportation networks. CLO structures provide one of the most efficient ways for investors to gain access to diversified pools of high-quality assets with longterm growth drivers at the risk and return profile of their preference.
Capital structure dynamics
CLO performance and demand differ across the capital structure. Equity investors are focused on locking in today’s historically tight liability spreads. With AAA tranches near pre-GFC tights, equity buyers see an opportunity to secure low-cost financing for the next five to seven years. This allows them to reinvest into loans at spreads that, even if modestly compressed, still offer positive arbitrage.
Read more: Barings lands Standard Chartered CLO mandate
For debt investors, the calculus is different. All-in yields on CLO tranches have tightened significantly, especially in AAA and mezzanine tranches. For example, the spread differential between a BB CLO tranche and a BB corporate loan is roughly 250 bps – a gap that some investors view as insufficient compensation for structural complexity. As a result, demand at the debt level is increasingly selective, with investors scrutinizing tranche pricing relative to comparable risk in the loan market. Still, CLO debt offers diversification and structural protections that appeal to insurers, banks and pensions.
Read more: Barings launches Europe’s first multicurrency private credit CLO
The investor ecosystem also continues to broaden. Insurers remain anchor buyers at the top of the capital structure, drawn by favorable NAIC treatment and stable spreads. Banks, both money-center and regional, are increasingly active in AAA tranches, while pensions are viewing mezzanine and equity as diversifiers within alternatives buckets. Retail access is growing rapidly as well through ETFs, which have scaled from near-zero to roughly $40bn (£30bn) of AUM in just two years. This democratization of CLO exposure adds marginal demand that has contributed to the spread tightening environment, reinforcing the need for disciplined credit selection.
Collateral alpha
With liability costs locked in and spreads at generational tights, the next leg of returns will not come from structural arbitrage – it will come from collateral alpha, or incremental returns generated through active credit selection and trading within the underlying loan pool. Managers will have to navigate idiosyncratic risks in leveraged loans, where dispersion is rising amid uneven consumer trends and technological disruption. Active trading, rigorous underwriting, and workout capabilities will undoubtedly define performance in the year ahead.
Read more: Barings launches first infrastructure CLO
Innovation will continue to expand the CLO opportunity set, but 2026 will reward managers who excel at credit selection and active collateral management.
For professional investors or institutional only. This document should not be distributed to or relied on by retail or individual investors. Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
By Adrienne Butler (pictured), head of global CLOs at Barings
This is commercial content, produced by Barings.
