The CLO Equity Arbitrage Challenge

Shiloh Bates explains why the natural equity arbitrage in broadly syndicated CLOs has been poor for at least two years, focusing on how captive equity funds create misaligned incentives between CLO managers and investors. He argues that excessive CLO formation has compressed loan spreads and financing costs, reducing equity profitability, and that index data shows only high single-digit returns for CLO equity — insufficient for the risk taken.