Executive Summary
Recent headlines suggest scepticism around CLO equity is high. Some of it is justified. We do not dispute that the recent experience of higher losses, for example, will continue. But part of the negativity also reflects the asset class’ transparency including daily pricing, liquidity, and granular reporting, especially when compared with private asset alternatives.
That visibility can make CLO equity appear uniquely vulnerable during periods of stress. In our view, however, the longer-term evidence tells a different story.
As we show later in this paper, CLO equity has delivered a strong and consistent performance track record across cycles. More importantly, we believe many of its structural advantages, particularly relative to private equity and private credit, are becoming more valuable in the current environment, not less. CLO equity does not rely on a market exit to generate returns, does not face redemption risk, and distributes cash early and regularly.
The current environment is challenging. However, historically, periods of dislocation have also produced some of the strongest CLO equity vintages on record. Wider spreads, volatility, and forced selling have repeatedly created attractive entry points for patient investors.
The catch is manager selection. Returns in CLO equity have never been evenly distributed, and we believe that dispersion is likely to widen materially from here. In a market defined increasingly by credit selection, trading expertise, and downside protection, manager quality will matter more than ever.
For investors able to navigate that dispersion, we believe today’s environment may represent a compelling entry point.
Key Takeaways
- Manager selection is the critical driver of returns, with total return-focused managers outperforming by a meaningful 3.8 percentage points of unrealised IRR since 2020
- CLO equity has delivered resilient returns across cycles — a median realised IRR of ~10% for redeemed European deals, with periods of stress historically producing the strongest vintages
- The structure offers advantages private equity and private credit cannot easily replicate: no reliance on a market exit, no redemption risk, and daily transparency
- Europe has consistently outperformed the US, with distributions exceeding US levels in 42 of the last 49 quarters
- Captive equity structures have reshaped the market, stabilising issuance and offering enhanced economics to investors inside them
Manager Selection Is Everything
As we emphasise throughout this paper, our view is that credit markets are evolving in ways that place far greater emphasis on a manager’s ability to underwrite risk. Just as we expect wider dispersion across the loan market, we believe the same dynamic will drive greater divergence in manager returns and in managers’ ability to raise capital.
One compelling way to think about this is through NAV protection. Dispersion across European CLO equity NAVs is already significant. Around 13% of European equity tranches had a negative NAV through April, extending to more than 20% of pre-2022 vintages.
We believe CLO investors will increasingly reward managers that protect NAVs through the cycle. That advantage translates into two outcomes on the liability side:
- Lower funding costs at origination
- Greater optionality to execute a reset
That divergence is already visible. As the chart below shows, the standard deviation in European CLO BB tranche pricing has widened materially in recent years, with a growing gap between the tightest and widest-priced tranches. We strongly believe that this trend has further to run.
Pricing differentiation between European CLO managers has increased for BB tranches
Figure 1: Range of European CLO BB Tranche Pricing Analysis by Manager Quarterly
Source: Sona Analysis, JP Morgan
Broader Credit Capabilities. Better Returns.
The current environment is a test, but not of portfolio size, diversity or AUM. It is a test of who has built the research infrastructure, origination and execution capability, and credit cycle experience to navigate a more challenging environment.
The software sector has been the clearest early fault line. The share of European CLO tech loans trading above par has fallen from 51% at year-end 2025 to just 25% today. Over the same period, the proportion trading below 90 cents has risen from 12% to 27%. Managers who saw this coming, entering the selloff with lower software exposure,
1 Source: Bank of America, Apr-26
2 Source: Bloomberg, Apr-26
3 Source: Bloomberg, Apr-26
reinvestment flexibility, and the ability to buy discounted paper as others sold, have already opened a meaningful performance gap that will likely widen as the cycle develops.
The 2028 European loan maturity wall which is the steepest on record, with approximately €100bn of loans maturing in the next three years (equivalent to 25% of the market), will force active credit judgement at scale. The mechanism that absorbed some of the European loan stress in 2022 and 2023, namely the private credit market absorbing supply, is itself coming under pressure. The amend-and-extend option that rescued many issuers in prior cycles may not be as widely available this time around. Managers who can distinguish early on between a borrower that needs more time and one that needs a restructuring, and act on that distinction, are likely to benefit.
The average software loan is down 6 points over the last year, and the maturity wall is the steepest in 10+ years
Figure 2: European BSL Technology Index Price vs. European BSL Maturity Wall
Source: Bloomberg, PitchBook
This is where manager credit capabilities matter. Managers that have built the expertise, either internally or through adjacent alternative credit strategies, to analyse recovery scenarios, navigate liability management exercises (LMEs), and engage constructively with borrowers through periods of stress hold a structural advantage in this environment that traditional performing-credit managers cannot easily replicate.
Specifically, we believe managers with a total return investing mindset are best positioned. Why? Because these managers inherently have mark-to-market connectivity. They also bring the discipline that comes from managing both long and short positions, experience that directly informs portfolio construction and sector weightings. Just as importantly, they are typically less constrained by the hold-to-maturity mentality that can define more traditional long-only strategies. The constant reassessment of relative value and the ability to walk away from a deteriorating credit is a genuine advantage.
That difference is already showing up in performance. We analysed unrealised IRRs across European CLO vintages for managers with broader investing capabilities that extend beyond traditional long-only strategies, including total return credit strategies, versus those without. Since 2018, managers with those capabilities have consistently outperformed. Since 2020, the average performance gap has been a meaningful 3.8 percentage points of unrealised IRR.
4 Source: PitchBook, Mar-26
5 Source: Sona Analysis, Intex, Apr-26
European CLO managers with total return capabilities have consistently outperformed
Figure 3: Unrealised IRRs by Vintage for Managers With Total Return Credit Investing Capabilities vs. Without
Source: Sona Analysis, Intex
Structural Advantages Over the Alternatives
Unlike private equity or private credit, CLO equity does not depend on a market exit to generate returns. There are no redemption gates to manage and no forced selling risk — the structure amortises naturally as underlying loans repay.
It is also front-loaded: the median European CLO 2.0 deal has returned 69% of cost to equity investors within four years of closing, compared with private equity’s increasingly back-ended distribution profile.
Europe vs. US
When institutional investors consider CLO equity allocations, they often default to the US market which is larger, more liquid, and more extensively researched. That instinct is understandable, but it is not reflected in realised returns.
In fact, Europe has consistently outperformed the US. This is evident in quarterly cash-on-cash (CoC) distributions, for example. Since the start of 2014, the average quarterly distribution for European CLO equity investors has been 4.3%, versus 3.6% in the US.
More importantly, that outperformance has been remarkably persistent. As illustrated below, over the last 49 quarters, European distributions have exceeded those in the US in 42 quarters. Importantly, this has held true in both benign markets and periods of significant volatility.
European CLO equity cash distributions have consistently outpaced the US
Figure 9: Quarterly CoC Equity CLO Distributions: Europe vs. US
Source: Bank of America, Intex
18 Source: Citi, Apr-26
19 Source: Bank of America, Intex, Apr-26
How Sona Approaches This
Sona’s CLO strategy takes an active management approach aimed at constructing high quality portfolios, combining capital preservation, active minimisation of tail risk, and the firm’s deep market connectivity across European leveraged finance.