Hidden leverage risks in private CLO structures
The guest argued that some private credit funds use private investment vehicles (PIVs) to hold complex, opaque collateralized loan obligations (CLOs) that mask true portfolio leverage.
The argument
The guest noted that Cliff Water holds roughly 39% of its assets in PIVs, which include private CLOs where underlying asset visibility is low. By securitizing loans off-balance sheet and retaining the equity tranche, funds can report these as unlevered assets to meet asset coverage ratios while still maintaining high structural risk.
The thesis, stress-tested
✓ What validates it
- ✓Sudden write-downs of CLO equity assets in semi-annual financial filings
- ✓Increased regulatory scrutiny or disclosure requirements regarding PIV holdings
▸ Risks discussed
- ▸CLO equity tranches are highly volatile and can be marked down rapidly during market stress
- ▸Diminished visibility into private CLO structures makes true risk assessment difficult for retail investors
Hear it yourself
"So some of what Cliff Water owns in that 39% total asset bucket of private investment vehicles and CLOs, some of that is LP stakes in other funds. Those funds, it's some of those funds are drawdown funds, and they haven't called all of the capital just quite yet, for example."
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