Complacent, machine, hungry, cockroaches, resilient and tight. These are some of the words panellists at the Opal CLO conference used to describe the state of the global CLO market.

Here are nine themes we noted from the Waldorf Astoria Monarch Beach.

1. Captive equity questions and poor CLO equity performance

Despite the generally positive performance of CLOs this year, CLO equity has not seen great returns. From a cash-on-cash perspective, it’s been one of the worst years for CLO equity in recent times, panellists noted. Both PO (principal only) and IO (interest only) are considered less attractive, and one panelist noted one of the only viable paths to creating equity is through some discount to fees outside of what’s outlined in the docs.

Captive equity funds have driven a lot of activity in recent years. But some captive equity models have raised concerns.

Initially, some captive equity funds (or, most likely, parent company backing) may accept more modest returns, such as 5% or 7% equity, to establish their platform and build a track record. However, a challenge for these managers is how they scale to meet market expectations of double-digit returns, one panellist said.

Another consideration for captive equity funds is the level of leverage applied. While these funds often advertise conservative IRRs, what’s less discussed, panellists noted, was the substantial leverage being used to juice returns. This leverage can come in the form of subscription lines.

In the secondary market, there are some interesting equity opportunities, with higher cash-on-cash returns available. In certain cases, investors can buy into CLO equity portfolios at a steep discount to NAV, and potentially generate significant returns without having to make specific market bets on individual loans.

Despite these opportunities, there’s growing consensus that equity IRRs are unlikely to hit the 13% to 14% levels that were once common. Most investors now expect more modest returns, around 10% to 11%. Many equity investors are planning for losses during periods of default, but in recent years, some funds have underperformed even in the absence of defaults.