How are CLO manager fees structured?

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AcadiFi · Accepted Answer

CLO manager fees are split into senior, subordinated, and incentive components, totaling roughly 40-55 bp per year plus performance-based upside.

Standard fee stack for a $500M CLO:

1. Senior management fee: 15-20 bp per year on the portfolio, paid near the top of the waterfall (after senior admin but before most note interest). This portion is robust to O/C test failures.
2. Subordinated management fee: 25-35 bp per year, paid only after all note interest and O/C tests are satisfied. This fee is at risk during portfolio stress.
3. Incentive fee: typically 20% of equity distributions above an 8-12% IRR hurdle. Paid after equity investors have received their preferred return.

Total cost: senior + subordinated = approximately 45 bp per year = $2.25M on a $500M CLO.

Incentive alignment:

- The senior fee guarantees baseline compensation even in stress, which critics argue dulls alignment.
- The subordinated fee sits behind debt service, creating strong incentive to keep O/C tests passing.
- The incentive fee ties manager to equity returns, aligning with the first-loss investor.

Additionally, many managers co-invest 5-25% of the equity tranche. Regulatory 'risk retention' rules in Europe and formerly in the US require 5% skin in the game, though US rules were vacated in 2018 for open-market CLOs.

For Eastmere Credit Partners managing 15 CLOs totaling $7B, the firm generates roughly $32M annual management fees plus potential incentive fees of $20-30M in strong vintages. Manager selection matters: top-quartile managers have delivered 400-600 bp of cumulative equity outperformance versus bottom quartile over the past decade.

How are CLO manager fees structured?

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