By Karl Cowman, Client Relationship Director
Once a niche liquidity instrument, collateralised fund obligations (CFOs) are fast becoming a structural pillar in fund finance.
CFOs are structured finance products that securitise investments in private equity or hedge funds, allowing investors to gain exposure to a diversified pool of fund interests while issuing debt and equity tranches backed by those assets.
At the recent European Private Credit and ABF Summit in London, our panel explored this evolution, examining how CFOs are moving from technical innovation to mainstream relevance. What emerged was a clear consensus: CFOs are no longer just balance sheet management tools. They’re becoming foundational instruments in the architecture of fund finance, bridging the long-term nature of private market assets with the liquidity and scalability of capital markets.
CFOs: From tactic to strategy
Historically, CFOs served a tactical purpose: unlocking liquidity from fund portfolios in a constrained environment. Today, they’re being deployed as strategic financing vehicles by private equity and private credit managers. This shift reflects a broader maturation of the CFO market, where issuance is no longer episodic but increasingly programmatic:
- GP-led and secondary-backed portfolios are driving issuance growth, offering tailored solutions for fund sponsors and investors alike
- CFOs are enabling managers to recycle capital, enhance internal rates of return (IRRs) and manage duration risk – all while preserving alignment with investors
Expanding investor appetite
One of the most encouraging trends is that a growing range of investors is now embracing CFOs. Insurers, pension funds and asset managers are increasingly drawn to these structures for their long duration and yield-efficient exposure to private markets without the operational complexity of direct fund investments.
- The structured nature of CFOs offers clarity on cash flows, risk tranching and regulatory capital treatment
- For insurers, in particular, CFOs present a compelling match for liability-driven investment strategies, especially when structured to meet matching adjustment criteria – a regulatory mechanism under Solvency II that allows life insurers to adjust the discount rate they use to value long-term insurance liabilities when those liabilities are backed by closely matched, illiquid assets
Innovation in structure and format
Innovation is accelerating across multiple dimensions of CFO design:
- Evergreen formats are emerging, allowing for continuous capital deployment and reinvestment
- Hybrid pools combining private equity and private credit exposures are offering diversified risk profiles
- Matching adjustment–friendly structures are gaining traction in the UK and Europe, aligning CFOs with regulatory frameworks and unlocking new demand
This structural creativity is not just about engineering complexity; it’s about solving real-world financing challenges and expanding the utility of CFOs across jurisdictions and investor types.
The imperative of transparency and ratings
As CFOs scale, the importance of robust data, transparency and credible rating frameworks cannot be overstated. Investors need visibility into underlying assets, cash flow waterfalls and performance metrics. Rating agencies, in turn, must evolve methodologies that reflect the nuances of private market exposures.
- Standardisation and data harmonisation will be key to unlocking broader distribution
- Transparent governance and reporting will underpin investor confidence and regulatory acceptance
Looking ahead: CFOs as market infrastructure
The trajectory is clear: CFOs are becoming a key facet of fund finance. They offer a scalable, flexible and investor-friendly way to connect private market assets with capital markets liquidity. As issuance grows and innovation continues, CFOs may well become as ubiquitous in fund finance as CLOs are in leveraged credit.
The challenge – and opportunity – for market participants is to build the ecosystem around CFOs: from data and ratings to legal frameworks and investor education. If done right, CFOs could redefine how capital flows into private markets for the next decade.
Looking to optimise your private credit strategy with structured solutions like CFOs? Contact our expert team to explore how tailored CFO structures can enhance liquidity, investor alignment, and long-term performance.
