Cliffwater Private Credit: is it a Fund of Fund or a CDO-squared? It doesn't really matter because the point is the same.

A CDO-squared (CDO²) is a collateralized debt obligation (CDO) that invests in tranches of other CDOs rather than directly in loans or bonds.

A Fund of Funds is an Asset Manager that invests in other funds that are responsible for managing the money.

To some, a fund packed with opaque private assets recalls some of the complex investments that Wall Street embraced — with disastrous results — in the run up to the 2008 financial crisis. "A Private Credit Fund of Funds in 2026 seems to rather closely resemble a CDO-squared in early 2007," billionaire DoubleLine CIO Jeffrey Gundlach said in a social media post on March 11, the day Cliffwater disclosed its redemptions - Bloomberg

What is crystal clear is that the team at Cliffwater were not primarily responsible for managing the money, they did not have a track record of selecting and investing in funds, nor did they have a track record of underwriting leveraging companies and their loans.

The Private Credit cycle has now turned, and redemptions have become widespread across the industry. Some BDC debt has started to suffer rating downgrades, while bond spreads are wider across the sector.

With deeper inspection it is very clear why investors received higher compensation from BDCs. They are simply higher risk than a leveraged loan or high yield fund, as we have documented.

When the credit cycle turns, defaults increase, recoveries are lower and second market liquidity deteriorates until the price reaches a clearing level and inflection point.

For this of us that were deep in credit be it junk bonds, CDOs, CDS, sub-prime, fund or funds and even CDO-squared, there are clear parallels between today's market and 2007.

Source: Bloomberg