The way I handle nested collections is with compound folder names.
For example - Sports Games. I have the following directory structure: Collection_Sports, Collection_Sports_Hockey, Collection_Sports_Baseball, Collection_Sports_Soccer, etc. In Collection_Sports, my menu.txt lists all the folders named Collection_Sports_*. within each of those, I either continue nesting, or create .sub files pointing to MAME, NES, Genesis, etc.