Private credit CLOs are expected to have a robust year of issuance in 2026, boosted by an anticipated resurgence of M&A and LBO activity along with increased investor demand. But concerns about credit quality abound.

The niche corner of CLOs – those that repackage direct loans rather than BSL loans – have been on a roll in recent years, commanding a bigger percentage of the market and rising to a new record in 2025, according to Creditflux data. This year promises more of the same, but with a potential increase in new deals.

“The private credit CLO market is primed for another big issuance year,” Seth Painter, Senior Managing Director and Head of Capital Solutions at Antares Capital, told Creditflux. “We expect M&A to pick up in 2026 which will support CLO new issuance. Additionally, CLO spreads remain attractive relative to other funding markets and the arbitrage continues to look favorable for equity investors.”

The Federal Reserve has already begun to cut interest rates, prompted by a weak labor market. Markets are forecasting for more, and President Donald Trump is jawboning for faster cuts – and lower rates would improve the climate for M&A particularly LBOs and thus lead to more direct lending deals, which serve as supply.

Last year, around half of private credit CLO issuance volume came from refinancings and resets, Painter said. This is because managers, including Antares, prioritized lowering the cost of funds for 2022 and 2023 deals. If M&A activity picks up as expected, managers may prioritise new issue deals in their pipeline and that could potentially bring down the percentage of refinancings and resets in 2026.

Moody’s Analytics predicts another robust year for US private credit CLO issuance that will match or slightly miss 2025 volumes.

“Middle-market CLOs may account for roughly 20% of total US CLO volume, similar to 2025 – around USD 30bn-USD 45bn – driven by resets and refinancings,” David Hamilton, Managing Director for Asset Management at Moody’s Analytics, told Creditflux.

The asset class is likely to see more interest from investor segments such as wealth-channel allocators, ETFs, and opportunistic funds this year, Hamilton said. Meanwhile, demand from the investor bases of banks and insurance companies remains solid.

Indeed, law firm McDermott Will & Schulte has been having some conversations about first-time issuers of middle market or private credit CLOs, according to Daniel Oshinsky, a partner at the law firm. Some of the investors the firm represents are looking at debut managers and showing more interest in all parts of the CLO market compared to last year, he said.

“Compared to a few years ago, investors benefit from the private credit CLO market’s longer operating history across a more diverse set of managers,” Painter said. “The investor base is simply more educated around performance and strategy differences – so that’s resulted in more investor participation, and it has also translated into some price-tiering across managers.”

Antares has seen more demand from investors turning to private credit CLOs for incremental yield as the overall credit market suffers from a tight spread environment. In particular, the firm has seen insurance investors in private credit CLO mezz tranches, he said.

That demand from investors should prevent spreads from widening significantly even if issuance ticks up.

“We would expect stable spreads throughout Q1 given the continued investor demand for private credit,” said Joe Evanchick, Managing Director and Head of Middle Market CLOs at Barings.

There is not an expected change in supply-demand dynamics for US private credit CLOs in the near-term, but interest rates continue to be top of mind for investors, Evanchick said. He warned that near-term interest rate cuts in the US look less likely than they did six months ago. And while there are expectations for a resurgence of M&A and thus loan volume, this is a prediction the market has made a few times over the last couple of years, he added.

Concerns around credit quality also linger ahead of what could be another fairly strong year for US private credit CLOs.

“Broadly speaking, middle market portfolios have weakened slightly from a year ago,” said Shan Lai, senior analyst at Moody’s Ratings. Though the median defaulted holdings in CLO portfolios remain low at less than 1%, the median WARF (Weighted average rating factor) has increased by 100 points or so to around 3,850 over the last 12 months.

Private credit CLO issuers are direct lenders and they have quite a bit of dry powder, which creates pressure to deploy, even if that sometimes means competing with the broadly syndicated loan market for deals.

“That dynamic sometimes results in potentially weakening underwriting on the one hand,” said Al Remeza, head of CLOs and structured credit at Moody’s Ratings. “On the other hand, we also know that private credit does pay strong attention to underwriting and has in many cases, taken deals that might have been weaker, worked with equity to improve the overall credit quality of the company as part of their underwriting.”

There will likely be more eyes on private credit and private credit CLOs in 2026, Remeza said. The underlying direct loans are more opaque than BSL, and there has been more scrutiny on all credit after the BSL CLO market was caught off guard with the First Brands debacle. However, these more opaque private credit CLOs also have their own ways of reducing risk.

“[Private credit CLOs] compensate by way of structure” Remeza said. “They typically have more subordination than a BSL CLO and therefore have more capacity to take that kind of riskier credit as it arises.”