CFO Market Update 2026: The Room Where It Happens

I. Executive Summary

Collateralized Fund Obligations (CFOs) are having a moment. Or, to borrow from Hamilton: “It’s not a moment, it's a movement.”¹

CFOs first emerged in the early 2000s before the financial crisis brought the capital markets (including CFOs) to a standstill. They have since returned with gathering speed: annual issuance climbed toward US$4 billion by 2022, paused briefly in 2023 as rising rates and uncertainty around proposals by the National Association of Insurance Commissioners (the NAIC) gave insurance investors pause, and has been growing meaningfully ever since. Market participants have estimated that annual issuance reached between US$20 billion and US$25 billion in 2025 alone, with activity expected to rise further in 2026, with some projecting that 2026 issuance could reach US$30 billion. We previously published a comprehensive overview of CFO structuring as CFOs were re-emerging [Link] and while we were excited at the potential uses for a CFO within the broader secondaries market, even we underestimated both the novel opportunities ahead and the growing investor appetite for this product.

If commoditization is the hallmark of a mature product, CFOs are anything but. The asset class remains highly bespoke, which is a reflection of the diversity of underlying collateral and the differentiated platforms that bring these deals to market. Despite, or perhaps because of, their uniqueness, CFOs present a compelling proposition, offering curated, diversified exposure to a carefully selected pool of underlying funds, with structural protections, an attractive yield profile, and access to strategies that are otherwise difficult to obtain.

II. The Basics

A CFO is best understood as a variant of a fund-of-funds whereby a bankruptcy-remote special purpose entity (the CFO Issuer) issues rated debt and unrated equity to investors to finance the acquisition and/or subscription of a pool of diversified fund interests (such as limited partnership (LP) interests) and other assets. These debt and equity interests are paid from the distributions received on the CFO Issuer’s assets. The technology that makes this all possible is drawn heavily from the collateralized loan obligation (CLO) space.

The underlying portfolio of a CFO can take many forms, including LP interests in private equity funds, venture capital funds, credit funds, evergreen funds, secondaries funds, hedge funds, real estate funds, energy funds, infrastructure funds, CLO equity and CLO equity funds, equity in ABS securitizations, direct co-investments in portfolio companies and broadly syndicated loan assets. Regular cash flow (infrastructure, credit, and to some extent, secondaries) is prized, while pure equity exposure adds volatility the structure must absorb. Adding income-bearing strategies to more equity- or real estate-concentrated portfolios helps ensure cash is available for distribution. For the same reason, funds in or near the harvest stage are preferred while new vintages tend to create more stress to debt service in the early years of a CFO. CFO structures offer the flexibility to accommodate many different products and asset classes so long as appropriate liquidity can be demonstrated and stress tests can be satisfied.

III. Some Structural Challenges

No Contractual Distribution Requirement: LP interests (unlike a portfolio of broadly syndicated or private credit loans) carry no scheduled principal payments or mandatory coupon. As a result, CFOs have built in a number of structural protections to ensure predictable cash flows to investors:

• Liquidity Facilities: The CFO Issuer typically enters into a rated revolving liquidity facility with a third-party lender, drawable to fund capital calls and bridge the timing mismatch between when capital calls must be funded and when distributions from the underlying portfolio are received. The facility generally has a term of three to five years (often aligning with or slightly exceeding the reinvestment period) and commitment size is generally 10–15% of total CFO issuance. Although these facilities are generally not expected to be fully drawn, their availability checks a rating agency and investor box in that it minimizes the risk that the CFO Issuer will be unable to meet ongoing obligations or fail to fund capital calls, the latter of which can carry punitive consequences under the underlying fund documents.
• LTV Tests: Rather than the overcollateralization and interest coverage tests common in CLO structures, CFOs are governed by loan-to-value tests that measure the ratio of outstanding rated debt to the aggregate net asset value (NAV) of the underlying portfolio. If the LTV ratio breaches a specified threshold (i.e., the portfolio’s NAV has declined relative to the debt outstanding) cash otherwise distributable to equity is typically redirected to pay down the rated debt, deleveraging the structure before losses can reach rated note investors. The LTV ratio often declines as time elapses, requiring the CFO to deleverage as the underlying funds mature.
• Equity First-Loss Protection: The equity tranche (typically all or some portion of which is retained by the sponsor) absorbs the first loss before any rated debtholder is impacted. Sponsor retention of the equity tranche aligns incentives between the issuer and investors and is generally viewed by rating agencies and investors as a meaningful credit positive. However, we have also represented some investors who have participated in the transaction via a vertical strip as an alignment technique.
• Liquid Asset Requirements: The CFO may be required to hold a specified percentage of its assets in money market funds or other lower-risk, readily redeemable instruments such as diversified bond funds, providing a baseline liquidity buffer independent of the revolving facility.
• Vintage Staggering: Some CFOs include staggered vintages in which more mature fund interests (i.e., funds that are closer to their final distribution date) are combined with newer fund interests still several years from harvest. This helps ensure adequate cash flow across the life of the transaction, with older vintages distributing in the earlier years and newer vintages contributing in the later years.
• PIK Interest: A CFO’s rated debt may, under defined circumstances, pay interest in-kind rather than in cash, and thus defer cash interest obligations during periods of reduced distributions without triggering a default. This feature provides the structure with additional flexibility to manage timing mismatches between LP distributions and scheduled debt service.
• Mandatory/Scheduled Redemption: Some CFOs require the sponsor to redeem or liquidate LP interests in stages over time (especially after the reinvestment period). The order and pace of redemption may be at the sponsor's discretion or hardwired in the documents, with the latter being more typical for individual fund positions or evergreen fund interests. This helps ensure adequate cash flow to amortize the rated debt after the reinvestment period.

Unfunded Capital Calls: A CFO holding unfunded LP interests must meet capital calls within a defined, often short, notice period or face penalties ranging from punitive interest and loss of distribution rights to forced sale of the LP interest at a discount to NAV or outright forfeiture. To manage this exposure, CFOs typically impose limits on the aggregate amount of unfunded commitments the portfolio may hold at any one time, and deploy a range of structural tools to ensure funding capacity: delayed draw notes issued by the CFO Issuer, cash reserve accounts (which may also be sized to cover fees, expenses, and interest for the next one to two payment dates), and the revolving liquidity facility described above.

In some cases, the sponsor or an affiliate may contractually agree to stand behind capital calls, but any such arrangement must be carefully structured to avoid undermining the bankruptcy remoteness of the CFO Issuer. Even absent a contractual obligation, many CFOs permit the equity tranche holder to make voluntary capital contributions for various purposes, including to fund capital calls. Where delayed draw notes or unfunded investor commitments are used, the creditworthiness of the relevant holders is itself a structural variable, typically addressed through minimum rating requirements applicable to initial holders and any transferees. There is also a growing practice of rating agencies requiring underlying fund GPs to look through the CFO Issuer when exercising remedies under the underlying fund documents, so that the CFO Issuer is not treated as a defaulting LP solely because its own investors have failed to fund.

Transferring the LP Interests: A CFO typically acquires LP interests by new subscription or by sale or contribution from a sponsor entity or equity investor. Moving LP interests into a CFO is not as simple as it sounds. This requires general partner (GP) consent in most instances, and every underlying fund must be diligenced to determine its applicable transfer window, AML/KYC requirements, investor eligibility criteria, and information-sharing protocols. Two related workstreams also deserve early attention. First, borrowing bases: an LP interest transfer can reduce the available borrowing base under an existing subscription credit facility, and lenders should be notified well in advance to avoid complications late in the transaction. Second, tax: an LP interest transfer across domiciles can carry tax consequences for the underlying fund that require advance analysis by fund tax counsel, a workstream that benefits from early engagement.

IV. Market Anatomy

Deal sizes in the CFO space span a broad range from approximately US$350 million for more focused portfolios to well over US$5 billion for large multistrategy platforms. Anticipated repayment dates typically fall in the five-to-seven year range, with legal final maturities of fifteen years or more. Capital structures generally feature Class A notes comprising 60–75% of the stack, typically rated A- to A, followed by Class B and Class C tranches (generally BBB- to BB), with an equity tranche absorbing first losses at the bottom. The relative sizing of each tranche reflects the specific collateral mix, vintage profile, liquidity characteristics and amortization setup of the underlying portfolio; no two CFOs look exactly alike, and the foregoing is intended to be indicative only.

The execution timeline is generally expected to run five to nine months. This is comprised of three broad phases: structuring, ratings and marketing. The structuring phase is where collateral selection, modeling and structuring occurs, with significant input from the placement agent, the rating agencies and anchor investors. The placement agent plays a particularly important role in a CFO, assisting with collateral modeling, rating agency engagement, and the placement of both the debt and equity tranches across what is often a complex and bespoke capital structure. The pace at which rating agency and investor feedback is incorporated will have a material effect on timing. One feature of CFOs that surprises those new to the space is that debt investors, as a group, frequently retain their own counsel to negotiate on their behalf.

The market has also evolved in terms of who is driving issuance. While the earliest CFOs were predominantly LP-led, GP-led structures have represented the vast majority of issuance over the past several years. We are now, however, seeing a meaningful uptick in LP-led issuance as institutional investors increasingly recognize the CFO as a tool to monetize and rebalance accumulated fund portfolios. Thus, history does repeat itself even in the financial markets.

CFOs can serve the interests of multiple different constituencies simultaneously, which is both the source of their appeal and a significant driver of their structural complexity. It is worth emphasizing that CFOs serve two distinct purposes that are sometimes conflated: as a liquidity tool, a CFO allows an existing LP or GP to monetize a portfolio of fund interests without selling into the secondary market; and as a fundraising tool, a CFO enables a sponsor to raise new capital from insurance companies and other regulated investors who would not otherwise invest directly in the equity of an underlying fund. These two use cases give rise to different structural considerations and investor dynamics, and sponsors should be deliberate about which objective is primary before beginning the structuring process.

• Rated Debt Investors: CFO rated debt is attractive to fixed income investors, including U.S. insurers who tend to look for long-dated, investment-grade assets to match long-duration liabilities. CFO rated debt, to the extent it qualifies as bonds under the principles-based bond definition adopted by the NAIC, carries materially lower risk-based capital charges (RBC) than direct LP interest holdings. The NAIC clarifications in this regard have been one of the key catalysts for the recent increase in insurance investor participation in CFOs. In addition, UK insurers are now exploring matching adjustment eligibility under Solvency UK reforms, with meaningfully better prospects for credit- and income-oriented portfolios than for equity-heavy ones, a dynamic that is actively shaping how European CFOs are being structured.
• Equity Tranche Investors: For investors willing to take the first-loss position, the CFO offers levered exposure to a curated and diversified portfolio of private fund interests, which would be an otherwise difficult return profile to access through a single, rated instrument. Sponsors have in some cases structured the equity into preferred and common tiers, unlocking demand from hybrid credit/equity investors and broadening the pool of equity capital available at formation.
• Sponsors and Asset Managers: For a GP, a CFO is simultaneously a liquidity tool, a capital formation vehicle, and a mechanism for broadening its investor base to include ratings-sensitive investors such as insurers. For managers with an established track record and a portfolio of mature fund interests, the GP-led CFO has become one of the most effective and versatile tools in the alternatives financing market. Sponsors should be aware, however, that CFO transactions give rise to inherent conflicts around the valuation of contributed fund interests, the selection of assets to be transferred to the CFO, the pricing and terms of capital raised, the redemption process of such fund interests, and the exercise of voting rights in connection with the underlying fund assets. Thus, it is critical for sponsors to work with experienced deal counsel to adequately disclose and manage these tensions.

V. The Regulatory Framework

CFOs sit at the intersection of a number of overlapping legal and regulatory requirements. The following is an overview of certain of those requirements.

• U.S. Risk Retention: Many market participants have taken the position that U.S. risk retention rules do not apply to CFOs backed by private equity fund interests, on the grounds that LP interests in private equity funds are not “self-liquidating financial assets” within the meaning of “asset-backed security” under the Securities Exchange Act of 1934, as amended. This analysis was developed principally in the context of traditional private equity-backed CFOs and should not be assumed to extend uniformly to all CFO collateral types. Whether risk retention applies to any particular transaction is a fact-specific determination that turns on the actual characteristics of the underlying fund interests (and possibly the liquidity assets bucket) comprising the collateral pool, including the nature of the funds’ investment strategies, their cash flow profiles, and how those interests are structured at the time of closing. The applicability of risk retention should be confirmed with experienced deal counsel based on the specific composition of the portfolio being securitized, and should not be assumed away at the outset of structuring.
• EU Securitisation Regulation: Whether a CFO constitutes a “securitisation” within the meaning of EU Regulation 2017/2402 is another fact- and structure-specific analysis, which turns principally on whether the transaction involves a tranching of credit risk. If it does, the full suite of EU securitisation requirements follows, including 5% risk retention, transparency and disclosure obligations, and ongoing monitoring and reporting obligations for originators, sponsors and institutional investors. Non-compliance can, among other things, result in additional capital charges for regulated EU investors. A materially similar framework applies under the UK Securitisation Regulation, which has diverged from the EU regime in certain respects following Brexit and continues to evolve.
• NAIC Bond Eligibility and RBC Treatment: The NAIC’s principles-based bond definition, which took effect January 1, 2025, has provided some needed clarity to the CFO market. Rated CFO notes that satisfy the new definition qualify for bond treatment under Schedule D and attract materially lower risk-based capital charges than a direct investment in LP interests. Two further regulatory considerations, however, deserve monitoring. First, the NAIC has flagged concerns about RBC arbitrage through structured products, and further scrutiny of rating methodologies, collateral diversification standards and structural features is possible as the market continues to grow. Second, and more specifically, the NAIC’s Securities Valuation Office (the SVO) has reserved discretion to challenge a rating assigned to a CFO note if it determines that the rating does not provide a reasonable assessment of risk for regulatory capital purposes, an emerging risk factor that is receiving increasing attention as CFO transaction volume grows and regulatory familiarity with the asset class deepens. Sponsors and their counsel should monitor SVO guidance and engage proactively with the rating agencies on the robustness of the rating rationale supporting each transaction.

Two further regulatory considerations, however, deserve monitoring. First, the NAIC has flagged concerns about RBC arbitrage through structured products, and further scrutiny of rating methodologies, collateral diversification standards and structural features is possible as the market continues to grow. Second, and more specifically, the NAIC's regulatory posture toward privately rated instruments — including CFO notes — has tightened materially. In August 2024, the NAIC passed an amendment authorizing the SVO to challenge credit ratings on filing-exempt securities where it determines they do not provide a reasonable assessment of risk for regulatory capital purposes (the Discretion Amendment). While the Discretion Amendment's original January 2026 implementation was subsequently delayed, a filing-exempt process reform that did take effect January 1, 2026 authorizes the SVO to review and remove a CRA rating from filing-exempt status on similar grounds — with the SVO then assigning its own NAIC designation and resulting RBC charge to the security, with potentially material consequences for insurance investors. Separately, the NAIC has required that private rating letter rationale reports be filed within 90 days of an annual update or rating change and that those reports possess analytical substance no less rigorous than reports for comparable publicly rated securities. In January 2026, the NAIC also established a Credit Rating Provider Working Group to develop a formal due diligence framework for the NAIC's reliance on CRA ratings in assigning designations; on May 4, 2026, that Working Group exposed a proposed CRP Due Diligence Framework for comment. The direction of regulatory travel is clear regardless of the precise implementation timeline: sponsors and their counsel should monitor SVO guidance closely, engage proactively with rating agencies on the robustness of the rating rationale supporting each transaction, and treat regulatory engagement as an ongoing workstream rather than a closing-date exercise.

• EU Solvency II and Solvency UK: For EU insurers investing in CFO notes, Solvency II may require a look-through to the underlying fund exposures for capital charge purposes rather than treatment based on the rating of the note itself. For equity-heavy collateral pools, this can produce increased capital charges approaching those applicable to a direct equity investment. Careful collateral composition (i.e., with a meaningful allocation to credit, infrastructure, and income-generating strategies) is essential for any CFO targeting European insurance capital. The position for UK insurers is more favorable following the UK’s reform of the matching adjustment framework under Solvency UK, which extended eligibility to assets with “predictable” (rather than strictly “fixed”) cash flows. Since the reforms that were introduced in 2025, we have closed CFO and rated feeder type structures designed to qualify for matching adjustment treatment under Solvency UK, with credit-oriented portfolios currently presenting better prospects than equity-focused ones.
• ERISA and Plan Asset Rules: If 25% or more of any class of “equity interests” in the CFO is held by “benefit plan investors” within the meaning of, and as interpreted by rules promulgated by (and under) ERISA, the CFO’s assets could be characterized as plan assets, which would trigger ERISA’s prohibited transaction rules and impose fiduciary obligations with respect to the management of those assets. This exposure is typically managed through investor representations at closing and ongoing transfer restrictions prohibiting transfers that would cause the 25% threshold to be exceeded, as well as careful monitoring of the investor base throughout the life of the transaction.
• Investment Company Act: CFOs must be structured to avoid registration as investment companies under the Investment Company Act of 1940. Given the fund-of-funds nature of the vehicle, this requires careful attention to the availability and continued reliance on an applicable exemption, most commonly Section 3(c)(1) or Section 3(c)(7), as well as compliance with the conditions applicable to any relied-upon exemption throughout the life of the transaction.
• Securities Law Considerations: CFO notes are typically offered and sold in the United States as private placements in reliance on Section 4(a)(2) of the Securities Act, with notes in many cases structured to be eligible for resale pursuant to Rule 144A. Concurrent offshore offerings are conducted in reliance on Regulation S. Applicable investor eligibility requirements depend on the exemptions relied upon: Rule 144A-eligible offerings are limited to qualified institutional buyers, while Section 4(a)(2) placements may be made more broadly to accredited investors meeting applicable sophistication standards. Where the CFO relies on Section 3(c)(7) of the Investment Company Act to avoid registration as an investment company, investors must additionally qualify as qualified purchasers. Transfer restrictions are embedded in the notes to preserve the availability of applicable Securities Act and Investment Company Act exemptions throughout the life of the transaction. We would note that as the CFO continues to mature we would expect to see it more closely align with how the CLO market (not the private fund market) operates in terms of documentation, including the preparation and distribution of comprehensive offering materials.
• Tax: LP interest transfers across jurisdictions can have tax consequences for the underlying fund, including potential withholding, effectively connected income, or UBTI exposure for tax-exempt investors that require advance analysis by fund tax counsel. FATCA and the OECD’s Common Reporting Standard impose additional diligence, classification, and reporting obligations on CFO structures with cross-border investor bases.

VI. Emerging Trends

Today’s CFOs are “not your grandfather’s Oldsmobile.” CFOs are no longer simple bilateral arrangements between a large LP and a single bank, backed by a handful of private equity fund interests and structured without a rating in sight. Today’s CFO is a fully rated, multi-tranche capital markets instrument attracting insurance companies, sovereign wealth funds and institutional fixed-income investors, securitizing everything from secondaries funds to continuation vehicles to CLO equity. Against that backdrop, the following represent what we see as the most significant emerging trends.

Investments in Evergreen Funds: Sponsors and investors are actively exploring ways in which CFOs can hold perpetual-life fund interests. Evergreen fund interests do not have defined distribution timelines, making cash flow modeling and debt service planning materially more difficult than for conventional closed-end fund collateral. Matching the duration of the underlying assets against the amortization schedule of the rated debt requires careful structural engineering but is something that several recent transactions we have been involved with have been able to solve for.

Perpetual-Life CFO Issuers: Market participants are also examining the question of whether a CFO issuer itself could be evergreen and issue multiple series of notes/equity, similar to an ABS master trust. Such a product could introduce additional diversity to the collateral mix, as well as an ongoing ability to raise capital without having to assemble a new pool of assets and create a new CFO issuer each time. An evergreen CFO could invest in both evergreen funds, as well as more traditional closed-end funds or products. However, given the complexity of master trust structures with multiple series, this strategy remains in the planning phase while rating agencies, managers and investors grapple with nuances inherent in a CFO, which is much less commoditized than traditional ABS master trusts.

Continuation Vehicles as Collateral: Another interesting development we have observed recently is the growing intersection of CFOs with continuation vehicles (CVs). As GP-led secondaries have matured into a recognized fourth exit route, alongside M&A, IPOs and secondary buyouts, continuation fund interests have emerged as attractive CFO collateral. Rather than launching a new continuation fund entity and running an LP election process, a GP can securitize interests in existing fund vehicles through a CFO, raising rated debt capital from insurance companies and other fixed-income investors while simultaneously providing liquidity to existing LP holders, all without the secondary market discount that a traditional LP tender would imply. The two structures are not mutually exclusive, and the most sophisticated sponsors are beginning to use them in tandem.

Preferred Equity: Raising equity capital has historically been one of the most significant execution constraints in CFO transactions. Preferred equity structures, sitting between rated debt and unrated equity, with priority distributions and subordinated risk, have attracted hybrid credit/equity investors and meaningfully expanded the universe of equity demand. In addition, a nascent market appears to be forming where third parties are willing to provide leverage on subordinated CFO equity.

Equity Feeders: We have also seen transaction-specific equity feeder vehicles structured alongside CFOs that invest in the subordinated CFO equity, either to isolate certain tax consequences or to accommodate a broader base of equity investors who may be unable to invest in the CFO directly due to investor eligibility, regulatory, or tax constraints.

Multi-Tranche Capital Structures: Over the past year, we have also seen a greater number of CFOs featuring four or more rated tranches, a development that utilizes the full spectrum of the ratings table and substitutes incremental rated debt for equity capital, improving overall execution economics. Rating agencies have confirmed the ability to rate these more complex structures, which is expected to accelerate adoption.

Broadening Sponsor/Issuer Base: In addition to the increase in LP-led CFOs previously mentioned, we have also witnessed a meaningful democratization of the CFO sponsor base. Early CFOs were dominated by large multistrategy platforms with the infrastructure to absorb the complexity and cost of these transactions. As the market has matured and deal costs have become better understood, mid-sized credit managers, secondaries specialists and infrastructure managers are increasingly turning to CFOs as an efficient capital formation and monetization tool. The market has now crossed the threshold where a manager with approximately US$500 million in target issuance can structure a credible CFO and place it with insurance buyers, a feat that would have been difficult three years ago. We have also seen unaffiliated GPs or sponsors teaming up to issue a CFO together, granting investors an even more diversified pool of collateral and at the same time reducing each side’s execution constraints around raising equity capital.

European Market Development: European issuance has grown significantly and is expected to continue accelerating. Several dynamics are driving this: European GPs are increasingly comfortable with the CFO format, following the lead of U.S.-headquartered platforms; European institutional investors, particularly UK insurers, are exploring CFO note investments in light of Solvency UK’s matching adjustment reforms, which extended eligibility to assets with “predictable” cash flows; and EU insurers are anticipating regulatory capital relief as the European Commission works toward analogous adjustments under Solvency II. A number of European managers we have worked with have structured CFOs designed specifically for matching adjustment eligibility. European CFOs also increasingly reflect geographically diversified collateral, typically weighted approximately 60% U.S., 30% European, and 10% Asian assets, which rating agencies view favorably from a diversification standpoint.

New Collateral Types: The range of assets being securitized through CFO structures continues to expand. Infrastructure fund interests, with their income-generating, long-duration profile, have emerged as particularly attractive CFO collateral given their cash flow predictability and alignment with insurance liability matching objectives. Private credit and direct lending fund interests, CLO equity and ABS residuals have become increasingly common collateral components. More experimentally, market participants are exploring the inclusion of sports franchise interests, royalty streams and litigation finance positions in structured vehicles drawing on CFO technology, though these remain at the frontier of what rating agencies are prepared to rate.

Rated Note Feeders: Alongside the traditional CFO, the rated note feeder (RNF) has emerged as an important and increasingly interrelated structure. Like CFOs, RNFs are experiencing record issuance volumes. Where a CFO securitizes a diversified portfolio of LP interests across multiple managers and strategies, an RNF allows investors to access a single manager’s fund strategy through a rated debt instrument. The two structures are best understood not for their differences but for their increasing convergence. Sponsors are increasingly evaluating both formats simultaneously, selecting the appropriate structure based on collateral composition, investor base and capital formation objectives, rather than treating the choice as binary.

Multi-Asset Structured Credit: Beyond the traditional fund-of-funds securitization, we are also beginning to see a new generation of multi-asset structured credit vehicles entering the market, including some in the form of securitization wrappers around portfolios of LP interests in credit-oriented closed-end and evergreen funds. These structures are not CFOs in the traditional sense, but they draw on the same technology and compete for many of the same fixed-income investors. Their emergence reflects the broader institutional demand for rated structured credit with differentiated underlying collateral in a structure that is more flexible than a traditional CLO transaction.

Documentation Standardization: As the CFO market matures, there is growing recognition of the need for greater standardization of deal terms, waterfall mechanics, coverage test thresholds and collateral eligibility criteria. This would be a welcome development for market efficiency and investor familiarity, and mirrors the trajectory of the CLO market in its earlier years. However, given the bespoke nature of CFO collateral pools and the highly varied objectives of sponsors and investors across transactions, full standardization remains a longer-term prospect. For now, the more realistic near-term development is convergence around a core set of market conventions, with bespoke terms layered on top.

Secondary Market Liquidity: One area of the CFO market that remains notably underdeveloped relative to the CLO market is secondary market liquidity for rated CFO notes. While a dedicated secondary bid is beginning to emerge as more institutional holders seek to actively manage their positions, the market remains thin compared to the CLO secondary market. This is in part a function of the bespoke nature of CFO structures and the complexity of underlying collateral, which makes standardized pricing difficult. As deal volume continues to grow and the investor base broadens, we expect secondary market liquidity to improve over time, and market participants with an interest in CFO notes as a tradeable asset class should monitor this development closely.

VII. Conclusion: The Pace Shows No Sign of Slowing

As we reflect on the state of the CFO market in 2026 a few things are clear. The structural framework is developing, the rating agency criteria are established, the investor base is engaged and growing, and the range of viable collateral types continues to expand.

What remains a bit of an open question is how the asset class will perform through a full credit cycle. Rated note structures navigated 2008–2009 without a default, but the data sample at that time was admittedly small. Duration risk, too, remains a concern for investors managing mark-to-market exposure across multi-year hold periods. These are not reasons to avoid the structure, but they are the questions that will define the market’s next chapter.

The broader context matters as well. The CLO market has become so efficiently priced and institutionalized that meaningful excess spread within it has become structurally difficult to generate. The market’s response, as it has always been, is to move toward less commoditized terrain. CFOs are among the clearest beneficiaries of that rotation, offering differentiated collateral, structural complexity that preserves spread, and an investor base still in the early stages of scaling its participation.

For asset managers who have not yet seriously evaluated the CFO as a capital formation or liquidity tool, the conditions are as favorable as they have ever been. The question is no longer whether the instrument is viable; it is whether a given sponsor’s portfolio, objectives, and investor relationships make this the right tool at the right time.

The room where it happens just got a lot more crowded.