CLO Manager Rankings and Evaluation
Manager quality is the single most important variable determining CLO performance, particularly for equity investors. Tier 1 managers outperform Tier 3/4 managers by 300-500 bps in equity IRRs over full cycle. This guide explains how to evaluate manager quality, interpret industry rankings, and identify key performance indicators that separate elite from mediocre CLO managers.
Why Manager Quality Matters
Performance Dispersion by Manager Tier
Equity IRRs by Manager Tier (2010-2024 avg):
| Manager Tier | Avg Equity IRR | Range (25th-75th %ile) | 2008-2009 Vintage IRR |
|---|---|---|---|
| Tier 1 | 15.8% | 14.2-17.5% | 8-10% |
| Tier 2 | 13.5% | 11.8-15.2% | 5-7% |
| Tier 3 | 11.2% | 9.5-13.0% | 2-5% |
| Tier 4 | 9.5% | 6.8-11.8% | 0-3% (some losses) |
Key insight: Tier 1 managers outperform Tier 4 by 630 bps annually. Over 10-year CLO life, this compounds to 90% cumulative return difference.
Why Performance Varies So Much
- Deal flow advantage: Tier 1 managers see loans first from Wall Street syndicate desks
- Credit team depth: 30-50 person teams vs. 5-10 for smaller managers
- Industry expertise: Sector specialists who identify deteriorating credits early
- Trading relationships: Better bid/ask execution due to volume
- Data and technology: Proprietary analytics, real-time portfolio monitoring
- Track record: Institutional investors provide cheaper equity capital to proven managers
The Industry Tier System
Tier 1 Managers ($15B+ AUM)
Elite managers with 15+ year track records, institutional platforms, and top-quartile performance across multiple credit cycles.
| Manager | CLO AUM (2024) | # of Active CLOs | First CLO | Survived 2008? |
|---|---|---|---|---|
| Blackstone Credit | $35B | 50+ | 2006 | Yes |
| Oak Hill Advisors | $28B | 45+ | 2000 | Yes |
| PGIM (Prudential) | $26B | 40+ | 2002 | Yes |
| Carlyle Global Credit | $24B | 38+ | 2005 | Yes |
| Ares Management | $22B | 35+ | 2004 | Yes |
| CIFC Asset Management | $21B | 32+ | 2003 | Yes |
| Apollo Credit Management | $19B | 30+ | 2007 | Yes |
| Benefit Street Partners | $18B | 28+ | 2009 | N/A (post-crisis) |
Tier 2 Managers ($5-15B AUM)
Strong regional or specialist managers with solid track records but less scale:
- MJX Asset Management ($12B)
- Palmer Square ($11B)
- Symphony Asset Management ($10B)
- Sculptor Credit ($9B)
- Shenkman Capital ($8B)
- THL Credit ($7B)
Tier 3 Managers ($1-5B AUM)
Emerging managers or niche specialists:
- 50+ managers in this category
- Often focused on specific strategies (middle market, ESG, opportunistic)
- Performance highly variable (some excellent, many mediocre)
Tier 4 Managers (<$1B AUM)
First-time issuers or very small platforms:
- Highest risk category
- Limited track record
- Often require co-investment from equity investors to reach critical mass
Key Performance Metrics
1. Equity IRRs by Vintage
Most important single metric. Compare manager's vintages to industry average:
| Vintage Year | Tier 1 Avg IRR | Industry Avg IRR | Tier 1 Advantage |
|---|---|---|---|
| 2007-2008 (Crisis) | 8-10% | 5-7% | +250 bps |
| 2010-2013 (Recovery) | 18-22% | 15-18% | +300 bps |
| 2014-2019 (Mature) | 14-17% | 12-15% | +200 bps |
| 2020-2022 (COVID+) | 14-17% (projected) | 12-14% (projected) | +250 bps |
2. Portfolio Default Rates
Lower default rates = better credit selection and monitoring:
| Manager Tier | Avg Default Rate (2010-2024) | 2008-2009 Peak | Interpretation |
|---|---|---|---|
| Tier 1 | 2.5% | 7.8% | Best credit selection; active monitoring |
| Tier 2 | 3.0% | 9.2% | Solid but not elite |
| Tier 3 | 3.5% | 11.0% | Below average credit discipline |
| Industry Avg | 3.2% | 9.8% | Benchmark |
3. Trading Activity and Turnover
Optimal turnover rate: 25-40% annually during reinvestment period
- < 20% turnover: Too passive; not upgrading portfolio or avoiding deteriorating credits
- 25-40% turnover: Active management sweet spot
- > 50% turnover: Over-trading; high transaction costs; potential style drift
4. OC Test Cushions
How much cushion manager maintains above minimum OC test levels:
| Manager Quality | Typical AAA OC Ratio | Cushion Above Trigger (130%) | Interpretation |
|---|---|---|---|
| Excellent | 135-138% | 5-8 points | Conservative; high credit quality |
| Good | 132-135% | 2-5 points | Balanced approach |
| Mediocre | 130-132% | 0-2 points | Tight management; risk of test failure |
| Poor | <130% | Negative (failing test) | Cash diversion triggered; equity distributions cease |
5. CCC Exposure Management
How managers handle distressed credits:
- Tier 1 avg CCC %: 3-5% (well below 7.5% limit)
- Tier 2-3 avg CCC %: 5-7% (using full bucket)
- Red flag: Consistently at or near 7.5% limit (chasing yield, ignoring risk)
Due Diligence Framework
Quantitative Analysis
Historical Performance (30% weight):
- Equity IRRs by vintage vs. benchmark
- Consistency across cycles (2008-2009 performance critical)
- OC test failure rates (lower = better)
Portfolio Metrics (30% weight):
- Default rates vs. industry average
- Recovery rates on defaulted loans
- Trading activity (turnover, bid/ask execution)
- OC cushions maintained
Scale and Resources (20% weight):
- Total CLO AUM ($15B+ preferred)
- Credit team size (20+ analysts preferred)
- Number of active CLOs (diversification of strategies)
- Years in business (10+ years minimum for Tier 1 status)
Structural Factors (20% weight):
- Manager equity retention (15-50% preferred)
- Alignment with equity investors
- Fee structure (reasonable vs. aggressive)
- Reputation with Wall Street banks (deal flow access)
Qualitative Analysis
- Credit philosophy: Conservative vs. aggressive; focus on downside protection?
- Investment process: Documented, repeatable credit underwriting
- Team stability: Low turnover of senior credit professionals
- Transparency: Quarterly calls, detailed reporting, accessibility
- Sector expertise: Deep knowledge in key industries (healthcare, software, etc.)
Red Flags to Avoid
- Frequent OC test failures: > 10% of portfolio deals failing tests
- High CCC exposure: Consistently at 7-7.5% (vs. 3-5% for peers)
- Excessive turnover: > 60% annually (over-trading, transaction costs)
- Underperformance vs. peers: Bottom quartile IRRs for 2+ consecutive vintages
- Team turnover: Frequent departures of senior credit professionals
- Style drift: Sudden changes in strategy (e.g., moving from conservative to aggressive)
- Lack of skin in game: < 5% manager equity retention
- Opacity: No quarterly calls, limited investor access, vague reporting
Where to Find Manager Data
Public Sources
- Trustee reports: Monthly reports show portfolio composition, OC tests, trading activity
- Offering memoranda: Disclose historical performance, team bios, investment process
- Intex/Bloomberg: Aggregated CLO performance data by manager
- S&P LCD: Leveraged loan and CLO market data
Subscription Services
- Creditflux: CLO manager rankings, performance data
- Wells Fargo CLO Research: Comprehensive manager scorecards
- BofA CLO Research: Manager tier lists and analytics
- Moody's/S&P reports: Manager track record analysis
Manager Selection Checklist
| Factor | Tier 1 Standard | Minimum Acceptable |
|---|---|---|
| CLO AUM | $15B+ | $5B+ |
| Years Operating | 15+ years | 7+ years |
| Equity IRRs (avg) | 15%+ (cycle avg) | 12%+ (cycle avg) |
| 2008-2009 Vintage IRR | 8-10% | 5%+ |
| Default Rate (2010-2024) | < 2.8% | < 3.5% |
| OC Test Failures | < 5% of deals | < 15% of deals |
| Manager Equity Retention | 20-50% | 10%+ |
| CCC Exposure | 3-5% | < 7% |
Key Takeaways
- Manager quality drives 300-500 bps difference in equity IRRs (Tier 1 vs. Tier 3/4)
- Tier 1 managers: $15B+ AUM, 15+ year track record, top-quartile performance
- Key metrics: Equity IRRs by vintage, default rates, OC cushions, CCC exposure
- 2008-2009 vintage performance is single best predictor of future resilience
- Manager equity retention of 15-50% ensures strong alignment
- Red flags: Frequent OC failures, high CCC exposure (>7%), bottom-quartile IRRs
- Use trustee reports, Intex, and subscription services for manager evaluation