Dechert has acted as lead counsel for Barings and Ares Management on four consecutive market-first European private credit collateralised loan obligation (CLO) transactions since December 2024. They progressed from an inaugural static structure to reinvesting and multicurrency models.
Aaron Scott, CLO partner at Dechert, was part of the teams advising on the deals, including the Barings Euro Middle Market 2025-1 private credit CLO that won an Impact Deal Award in Securitisation and Structured Finance at the IFLR Europe Awards 2026. As Scott explains, the resulting frameworks could provide a blueprint for further European private credit CLO issuance as more managers enter the market.
Why now? What has changed to make European private credit CLOs viable?
European private credit has reached a scale and maturity that makes structuring a CLO possible and attractive to investors. Managers have larger, more established portfolios, while investors are becoming more comfortable with the product, supported by the development of the US private credit CLO market.
It also required managers with sufficiently large and diverse portfolios to commit time and resources to an unproven product in Europe. Barings and Ares have played an important role in taking that first step and moving the market forward.
Before the first Barings transaction, what were the principal obstacles preventing the development of a European private credit CLO market, and how were those obstacles overcome?
One of the main challenges was assembling a portfolio of private credit loans with sufficient diversification and credit quality to meet rating agency requirements. That is particularly difficult in Europe because of the multiple currencies and jurisdictions involved, and the market’s smaller scale relative to the US.
There was also uncertainty around execution and investor demand. It was difficult for managers to predict the credit estimates rating agencies would assign to the underlying loans and whether those assessments would support a viable transaction. Investor appetite for a new European product was also untested.
Multicurrency structures have helped address the diversification challenge. With several transactions now launched, managers also have greater visibility on rating agency credit assessments and investor appetite, making subsequent deals easier to plan.
How did the market evolve from the inaugural Barings transaction through to Ares European Direct Lending CLO II, and how did the transactions differ in terms of reinvestment features, currency denomination, and overall structure?
We have moved from proving the concept to developing a more flexible, repeatable model. The first Barings transaction was static, with no reinvestment period, giving investors greater certainty over the initial portfolio and taking reinvestment risk off the table. The next transaction, launched by Ares, introduced a reinvestment period. Now, we have reinvesting transactions that also issue debt in multiple currencies.
The first deal required documentation and methodologies to be developed largely from scratch. How do you approach creating a legal framework where no European precedent exists?
We could draw on established CLO technology, but each provision had to be tested against European private credit assets and market practice. The process required managers, arrangers, rating agencies and counsel to work through issues together and develop a structure that was both commercially workable and capable of being replicated.
Why was the multicurrency structure introduced in the Barings Euro Middle Market 2025-1 CLO so important, and what problem did it solve for managers?
Building a sufficiently diverse asset pool has been the defining challenge for managers seeking to establish a European private credit CLO. Europe’s multicurrency loan market adds to that challenge. Traditional CLO structures are typically denominated in a single currency, so holding loans in other currencies requires swaps to hedge the currency risk, adding cost and complexity. Restricting the portfolio to a single currency, however, narrows the available asset pool and makes diversification harder to achieve.
The multicurrency CLO structure helps to address this issue. By raising liabilities in both euros and sterling, these vehicles create a natural currency hedge – euro proceeds fund euro-denominated assets and sterling proceeds fund sterling-denominated assets – eliminating the cost and complexity of perfect asset swaps. The result is a materially broader eligible asset pool, enabling managers to source loans across a wider range of European jurisdictions without currency mismatch risk.
Dechert has acted as manager’s counsel on more private credit CLOs than any other law firm in the US. How did that experience help when bringing the product to Europe and developing the European market?
Our US team’s experience has been invaluable. The team have helped shape the US private credit CLO market from the outset, giving them deep experience and a thorough understanding of the market. They have seen it all, and that has helped us see around corners and anticipate where difficulties are likely to arise.
We’re always looking to learn from our colleagues and share best practices with each other, drawing on this combined knowledge and expertise to develop innovative, practical solutions that support our clients’ objectives.
In an IFLR interview in October 2025, Dechert partner Sushila Nayak identified collateral diversity and multicurrency structures as key hurdles for the European private credit CLO market. How have those challenges been addressed?
Multicurrency structures have played an important role in broadening the eligible asset pool. Alongside that, all deals so far have included a broadly syndicated loan (BSL) bucket which can be used to enhance diversity.
More recently, we have seen hybrid transactions combining private credit assets and BSLs. The BSL allocation can provide diversification while the manager originates private credit assets, offering a more flexible route to building the portfolio.
How are wider economic and geopolitical developments influencing the private credit market today, and what effect are they having on CLO issuance?
While 2026 has brought periods of turbulence and greater scrutiny of private credit, particularly around credit quality, transparency and liquidity in certain fund structures, we remain positive about the long-term growth prospects for European private credit and the opportunities that growth could create for CLO issuance.
Looking ahead, what does the next phase of the European private credit CLO market look like? Are there further structural innovations to come, and do you expect more managers to enter the market?
We now have a solid foundation for further issuance. Hybrid CLOs could also provide an entry point for more managers. Looking ahead, we see three potential areas of development:
Parallel development of both pure private credit CLOs and hybrid CLOs. We think there is room in the market for both products.
Managers exploring additional currency combinations. To date, multicurrency transactions have paired euros and sterling. It will be interesting to see whether managers introduce other combinations, such as US dollars and euros.
Greater use of private credit CLO warehouses to build portfolios specifically for a CLO takeout.
We expect these innovations will lead to more managers coming to market.
You began your legal career in New Zealand before moving to London. How did that journey lead you into CLOs and structured finance?
The size of the market in New Zealand meant my role covered a broad range of finance work. Moving to London gave me the opportunity to focus on structured products and work alongside the CLO team. I was immediately drawn to the pace and complexity of their work, so I moved into a dedicated CLO role and haven’t looked back since. At Dechert, I’m incredibly proud to work alongside such a talented team on market-leading deals to support our exceptional global asset manager clients. It has been exciting to see the asset class grow and evolve over the past decade, and I look forward to seeing what the next ten years will bring.
Aaron Scott
CLO partner, Dechert
