In this article, the authors investigate the drivers of CLO equity return and how to identify a good CLO manager. Pre-crisis collateralized loan obligation (CLO) structures proved to be very robust in the end. Today's CLOs are structured more conservatively with generally more CLO debt subordination, cleaner asset pools, and less reinvestment flexibility. Looking at historical CLO equity performance, CLO 1.0 equity benefited from having cheap funding costs and opportunities to buy discounted loans during the financial crisis, ultimately achieving over 20% IRR. CLO 2.0 equity's returns have been running lower so far in a benign credit market. The authors note that top-quartile US CLO equity always delivered lowto-mid- teens' returns, regardless of market timing. It is also worth noting that CLO equity's deal-level and manager-level performance dispersion is evident across different vintages and even more pronounced today than before the Global Financial Crisis as the number of US CLO managers grew from 100 managers pre-crisis to more than 130 today, with the outstanding US CLO market having more than doubled in size.
