Collateralized Fund Obligations (CFOs): The Technicolor Dreamcoat of Fund Finance

Over the past several years as Collateralized Loan Obligations (“CLOs”) reached new and dizzying heights in issuance volume, CFOs have been quietly, and under the radar, gaining market acceptance and momentum among asset managers, owners and investors. The CFO is a transformational technology for vehicles designed to finance limited partnership interests in private funds (“LP interests”) and other assets (together with LP interests, the “Private Financial Assets”). CFOs have their roots in the early 2000s and had hitherto been more of a niche product focused primarily on providing liquidity for limited partnership interests of private equity funds. However, a confluence of factors have piqued interest in the product. Chief among these are (i) the growing (but still inefficient) secondaries market which can make sales of LP interests unattractive, (ii) the ability to collateralize CFOs with a variety of different financial assets (including credit opportunity funds, buy-out funds, infrastructure funds, real estate funds, private credit funds, co-investments, asset-based securitizations (“ABS”), CLO equity, and residuals in securitizations) and (iii) the desire of certain classes of investors such as insurers, sovereign wealth funds and other regulated investors to gain exposure to Private Financial Assets in a structured and capital efficient rated format.

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