A collateralized fund obligation (CFO) is a form of securitization involving private equity fund or

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as s ...

assets, similar to

collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Le ...

s. CFOs are a structured form of financing for diversified private equity portfolios, layering several

tranche In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indenture) ...

s of

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

ahead of the equity holders. The data made available to the

rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...

for analyzing the underlying

private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...

assets of CFOs are typically less comprehensive than the data for analyzing the underlying assets of other types of structured finance securitizations, including corporate bonds and

mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...

Leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever * ''Leverage'' (album), a 2012 album by Lyriel *Leverage (dance), a type of dance connection *Leverage (finance), using given resources to ...

levels vary from one transaction to another, although leverage of 50% to 75% of a portfolio's net assets has historically been common. The various CFO structures executed in recent years have had a variety of different objectives resulting in a variety of different structures. These differences tend to relate to the amount of equity sold through the structure as well as to the leverage levels.

Basic structure of a CFO

Generally, money is allocated into several different tranches by investors based on priority. A tranche is described as a security that can be divided into small portions and then sold in those portions to an investor. From the tranches the funds are then invested into a special purpose vehicle (SPV). SPVs are developed solely for the purpose of a CFO.

Private equity CFOs

Since the advent of CFOs (ca. 2002), there have been only a handful of publicly announced private equity securitization transactions. Typically, owners of private equity assets will securitize a portfolio of funds as a way of generating liquidity without an outright secondary sale of the funds. * In 2006

Temasek Holdings Temasek Holdings (Private) Limited, or simply Temasek, is a Singaporean state holding company owned by the Government of Singapore. Incorporated on 25 June 1974, Temasek owns and manages a total of US$496.59 billion (S$671 billion) in assets u ...

completed $810 million securitization of a portfolio of 46 private equity funds. * SVG Capital has executed three CFO securitizations as part of its "Diamond" program, SVG Diamond (2004), SVG Diamond II (2006) and SVG Diamond III (2007). * Alongside its CLO program, Mizuho IM has launched its first CFO called Vintage I in 2007, a EUR 500 million fund investing in global buyout funds. The investment has proved extremely successful so far. Now under the ownership of 3i Group, the Vintage team closed a second US$400 million Vintage II. * Tenzing (2004) — Securitization of private equity fund assets by

Invesco Invesco Ltd. is an American independent investment management company that is headquartered in Atlanta, Georgia, with additional branch offices in 20 countries. Its common stock is a constituent of the S&P 500 and trades on the New York stock exc ...

* Pine Street (2003) — Securitization of private equity fund assets by

AIG American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. , AIG companies employed 49,600 people.https://www.aig.com/content/dam/aig/amer ...

* Silver Leaf (2003) — Securitization of private equity fund assets by

Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...

References

Rating Private Equity CFOs: Stochastic Market Cash FlowsSecuritizing private equity
Private equity Financial economics Private equity secondary market {{private-equity-stub

Basic structure of a CFO

Private equity CFOs

See also

References