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Nick Losey is a CLO portfolio manager and analyst at Barrow Hanley. The Dallas, Texas-based manager has printed three US BSL CLOs since its debut in 2023 and is fundraising for its second captive equity fund, as we reported last month.

We caught up with Losey on the highs and lows of fundraising this year, LP engagement, US Fed rate cuts this week, and taking a contrarian view on loans.

1. We noted the reset of your inaugural deal this year in January, and that CLO II and III are set to leave their non-calls in October 2025 and April 2026, respectively. As we near the last stretch of 2025, what are your plans for issuance?

The primary focus is resetting CLO two. We're already having those discussions, and its performance has been fantastic. We have built par since inception, which will allow us to upsize the deal fairly materially, from $400 to $500m.

Next, we are trying to close our second CLO equity fund. We're setting a November timeframe to close. This will allow us to re-enter the new issuance market. Until we have additional equity, we're just showing the market what we can do from a manager and performance standpoint.

One of the things that helped us raise the first CLO equity fund was, if you package our existing loan performance into a CLO, it performs extremely well. We've got two and a half years now of track record as a CLO Manager, which is proving attractive to investors.

2. We've reported that you’re aiming for a first close of over $120m and up to $150m for your second captive equity fund. How many CLOs do you expect this fund to support, in what markets, and when do you expect to roll them out?

We are looking for the fund to be slightly bigger than the original fund. Timeline-wise, I would expect to start deploying the capital in 2026 through mid to maybe late 2027. With market cycles, where we are, and what impacts come in the next two years, we may accelerate to a certain degree.

It will be broadly syndicated-focused, that is our bread and butter. Barrow Hanley has been around for 46 years, the vast majority of the firm is public equities. Our portfolios tend to skew higher exposure to public equity issuers and on average larger issues. They're more judicious with their capital structure, more creditor-friendly, because higher leverage doesn't necessarily increase returns. You get a higher multiple by being a good steward of capital in the equity markets.

We really launched the fundraising process at the end of last year. April came around and we hit the pause button for a short bit. The vast majority of people we have been speaking with do put CLO equity into their alternative buckets. Some of our institutional investors noted the decline in equities caused their alternatives bucket to increase to an over-allocated status. The delay for us has been a net positive given the increase in equity prices which has opened up some alternatives allocation buckets. We'll likely see a handful of institutional investors come in on the second fund, now that we're looking at closer to an end of the year close.

3. What are the priorities and concerns of LPs in your fundraising experience this year, and how do they compare with when you pitched your first CLO captive equity fund in 2022?

Our firm has quite a bit of pensions as investors, and a lot of institutional, endowments and foundations. They tend to have a much higher bar for investing in a new strategy within a firm. So, we had a lot of conversations but didn't have any real bites for fund one. For fund two, our conversations are a lot more serious. Do we get any actual pensions? That's a maybe, but we are going down that path. We have a bit of an edge with some, being able to leverage our existing broader platform’s investor base. It likely will be more of a fund three, fund four, type benefit that we'll see, but it is there.

People are starting to question if you're really going to get double digits from private credit, because you've seen such a massive increase in the amount of available capital that private credit managers have to put to work. You are starting to see some of the cracks in private credit, looking at the BDCs’ PIK rates and default rates.

The other element is, as investors are really thinking about their opportunity set out there, equities look generally expensive. Investment grade has extended duration. Treasuries has a lot of duration. And risks in the market today are largely macro-geopolitical. When it comes to the equity market, the biggest contributors to return are theoretically rate-sensitive. A lot of investors are looking at this and see the rate volatility we have been in. Credit product feel like a better risk/return option versus most other asset classes right now.

4. Globally, institutional investors this past year have signaled growing interest in the CLO market. What’s drawing them in, and what newer types of LPs have you noticed in this current fundraising round?

CLO equity in particular has been able to prove cycle after cycle that it is a lot more durable than the vast majority of other structured products, and it comes down to the reinvestment capabilities and management of the structure during that reinvestment period. It makes CLO equity long volatility. And you're starting to see people talk about this more and more.

Going back to the early 2000s, it really was just a small subset of large institutions that would consider CLO equity in their portfolios. Now that has widened to a lot more institutional investors. Plus, it is a cash flow paying instrument so endowments and foundations have been really keen on adding CLO equity because it's very beneficial as they're not taxpayers.

Many investors are now looking for alternatives to private credit. CLO equity before was always just, hey, this is really complicated. Don't want to bother with it. I'll have to educate my client, don't want to do that. Now, investors see that it's worked. Private credit has been the hot dot that opened the door for all of these platforms to spend a lot more time getting to know CLO equity and other credit alternatives.

We are talking with a few Asian and Australian clients. They tend to like credit and credit products. I would consider them very similar to a lot of US institutions. They're very savvy on credit products, got into private credit in that '10, ‘11, ‘12 timeframe, are now looking at other things. And a lot of those investors already have CLO equity in one way, shape, or form already.

5. It’s been a whiplash year for CLO primary spreads, which were tightening into February but widened dramatically in April after Liberation Day and have since slowly tightened again. Where do you predict spreads will go for the rest of this year?

In general, it'll probably continue to tighten. If I were to peg a year-end target, which is always hard to do, I would put it at the 120 level. Not materially tighter, to the March levels, because we still have a lot of uncertainties out there in tariffs and how that will ultimately flow through P&Ls and impact cash flows for companies.

I do continue to see a demand for floating-rate, because when you look at the peak in Fed rates, every time the Fed has actually cut rates, you have seen 10-year, 30-year rates increase. So, it'll be interesting to watch the rest of the curve if the Fed cuts in this September meeting. But when you think about all those macro risks, it's creating upward pressure on future rates. So having floating rate exposure in portfolios is going to become more desirable.

Now, should the Fed cut in September? I've always leaned towards no. Stocks are at all-time highs, the only thing you can point to right now is that labor is potentially a bit soft, but there's a lot of interesting moving pieces that could be creating some of that softness. So, does the Fed cut on a softening labor market? I don't know, probably. I do think that there's still a strong desire to get to a normalized yield curve, and lower short-term rates helps the dollars externally outside the US start to float back around and likely come back in the US. So, there's a lot of reasons why it makes sense to cut, but a lot of fundamental reasons where I don't think it makes sense at all.

6. How are you thinking about the possibility of Fed rate cuts and their effect on the loan market in your credit analysis?

Given that the next move is likely down, the credit analysis is not really affected. It's generally positive if all of these companies, theoretically, pay a bit less. Not all of them are hedged perfectly, there's some hedges in place, so they won't see the full benefit for a little while. I do think on the margin, the bid from retail mutual funds for leveraged loans outside of the CLO world, the demand (for loans) is just naturally going to go down, all else equal.

That could, I'm selfishly hoping, create some price volatility. I do hope we get a Fed rate cut that actually impacts pricing of loans to the point where we at least stop seeing these repricing waves. That would be beneficial for our CLO equity investors.

7. Triple-C buckets have so far held steady in reinvesting CLOs, yet delayed fallout from tariffs is expected. Have you been revisiting your approach this year to putting credits on a watch list, rethinking underwrites, or selling names?

Yes, is the answer. We're always reacting to changes in the market. It's still early in having tariffs flow through P&Ls. We had a lot of forward buying to get around not paying tariffs, some delays in initial tariff rates, and the tariffs, all else being equal, have been generally not that bad so far.

Are we getting compensated for taking certain risks in lower quality B3, B-, and triple-C's? Right now, generally no. This is the point in the cycle where you probably over-diversify your portfolio and reduce exposure to those triple-C and B-minus names.

That being said, we've had a handful of names that reset price-wise, starting in April. And there are select situations, that we have either been able to spend a lot of time getting up to speed, or already knew the company, that we're very comfortable with where it sits and what levers it can pull on its margins. And we’ve done cash flow generation analysis and sensitivities to where, all else equal, we're nibbling on a couple of B-minus and one or two triple-C names.

8. You’ve spoken publicly of having a different approach to credit management given your location in Dallas, outside the coastal investment hubs. What is a contrarian view you hold about the loan market?

It is interesting not being in New York, outside of groupthink-type situations. I hesitate to call this a contrarian view, but one view I have held for the past three years, that rates are going to stay higher, much longer, than people expect. I still think that's the case. I don't think a lot of B-minus, triple-C names are going to get the benefit of lower rates that will all of a sudden make the cash flow and capital structure work.

One other contrarian view is, I have generally thought it has been not appropriate for tech and software names to add deferred revenue to EBITDA. That is a working capital item. It works when the business grows, but it becomes a cash use, when the business flat-lines or shrinks. So that is one factor that has kept us smaller in our tech exposure. Because if you take out the deferred revenue from the company’s presented adjusted EBITDA, all of a sudden leverage is eight, nine, 10 times pretty easily.

9. Now that the summer's behind us, what is one thing you regret not having done before Labor Day?

I should have taken a couple of vacation days before Labor Day, in late August. This summer, it finally felt like we got a week-long lull in the high yield and loan market. We actually got about a week and a half of what would be traditionally the dead summer weeks. Those ended up being really good reading days. So, although I caught up on a lot of reading, maybe I probably should have taken a vacation day or two.

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