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A collateralized fund obligation (CFO) is a form of
securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...
involving
private equity fund A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
or
hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
assets, similar to
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
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 indent ...
s of
debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
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 r ...
for analyzing the underlying
private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
assets of CFOs are typically less comprehensive than the data for analyzing the underlying assets of other types of structured finance securitizations, including
corporate bond A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, mergers & acquisitions, or to expand business. It is a longer-term debt instrument indicating that a corpo ...
s and
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
. Leverage 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 (), 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 ( ) is a Singaporean State ownership, state-owned multinational investment firm. Incorporated on 25 June 1974, Temasek has a net portfolio of US$288 billion (S$389 billion) as of 2024. Headquartered at Orchard ...
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 headquartered in Atlanta, Georgia, with branch offices in 20 countries. Its common stock is a constituent of the S&P 500 and trades on the New York Stock Exchange. Invesco oper ...
* 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. As of 2023, AIG employed 25,200 people. The company operates through three core ...
* Silver Leaf (2003) — Securitization of private equity fund assets by
Deutsche Bank Deutsche Bank AG (, ) is a Germany, German multinational Investment banking, investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Stock Exchange. ...


See also

*
Collateralized mortgage obligation A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor need ...
*
Private equity secondary market In finance, the Private Equity Secondary Market (also often called Private Equity Secondaries or Secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds or the un ...


References


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