Collateralised Fund Obligations – GLI Pink Book 2026

Over the past few years, collateralised fund obligations ("CFOs") have become increasingly popular for financing equity interests in private funds and other assets, offering an alternative liquidity solution to traditional portfolio secondary sales. In the latest edition of Global Legal Insight's 2026 Fund Finance Laws and Regulations, also known as the 'Pink Book' in the fund finance community, Dechert's Global Finance and Financial Services groups have published a chapter titled 'Collateralised Fund Obligations'.

Key Takeaways

• Comprehensive Overview of CFOs: The chapter sets out what CFOs are, outlines their basic structure and terms of a CFO transaction, and discusses relevant regulatory considerations.
• Closing Considerations of a CFO: It looks at the key considerations for GPs of transferring funds and CFO sponsors as transferring limited partners.
• Growth of CFO Market: The chapter analyses the factors driving recent market growth and concludes by highlighting the overall opportunities and effectiveness that CFOs offer, anticipating that they will continue to gain momentum in 2026 as a viable alternative investment solution.

Introduction

Over the past several years, collateralised fund obligations ("CFOs") have seen an explosion in popularity as a means of financing equity interests in private funds and other assets and providing an alternative liquidity solution to the more standard portfolio secondary sale. CFOs first came to market in the early 2000s, although their use has been hitherto relatively marginal. The recent growth of interest in CFOs has been driven primarily due to: (i) the strong desire of certain classes of investors (e.g., insurance companies, sovereign wealth funds and other regulated investors) to gain exposure to non-traditional asset classes such as private credit, private equity and secondaries funds in a structured and capital-efficient rated format; (ii) the fund sponsor's growing need for alternative liquidity options while offering attractive investment opportunities for a wide variety of investors; (iii) the ability to diversify collateral with a variety of different financial assets with varying risk profiles, such as private equity funds, pension plan funds, credit opportunity funds, buy-out funds, infrastructure funds, real estate funds, private credit funds, co-investments, asset-based securitisations ("ABS") and residuals in collateralised loan obligations ("CLOs") and other securitisations; and (iv) the growing (but still inefficient) private funds' secondaries market, which can make sales of limited partnership ("LP") interests unattractive.

CFOs, despite their bespoke complex structure, can be tailored to the needs of investors and fund sponsors. Financing fund interests (as defined below) via a CFO offers a long-term capital markets solution with more favourable costs of funding than certain shorter-term financings executed in the private, bilateral/club market, such as net asset value ("NAV") facilities. In the case of the regulated investors (e.g., insurance companies) subject to risk-based capital requirements, holding rated debt issued by a CFO offers better capital treatment than holding fund interests individually and directly. This is primarily due to the fact that CFOs generally (though not always) benefit from broad and diverse fund interests that are supported by structural credit enhancement features, such as overcollateralisation, subordination and liquidity support, which enable them to issue a majority of their capital structure in the form of investment grade rated debt.

What is a CFO?

A CFO is a structured transaction that involves the securitisation of various fund interests (such as equity interests in private funds or less liquid registered funds) and other assets. In a typical CFO, fund interests are transferred to an asset holding company that is in turn held by an issuing entity (CFO issuer) that issues debt (generally in the form of notes) and equity interests to investors. The debt and equity interests are backed by the payment streams received from the fund interests. Although CFO transactions often involve assets other than fund interests, this practice note will generally refer to assets of a CFO as simply "fund interests".

Notwithstanding the foregoing, there is no one "standard" CFO. As noted, they are tailored to accommodate the needs of the investors and/or fund sponsor. Given such no-one-size-fits-all feature, CFOs can be structured with assets that do not fit neatly into any of the more traditional channels and be designed in a way that takes into account the specific regulatory, capital and/or tax requirements of CFO Issuer (as defined below) and investors. While it can be complicated, its bespoke no-one-size-fits-all structure offers flexibility, which in turn creates appeal to many market participants.

Basic Structure of a CFO

In a typical CFO, a bankruptcy-remote special purpose entity ("CFO Issuer") purchases and holds, directly or indirectly, a diversified portfolio of fund interests, which is financed by issuing one or more rated debt tranches and a single class of unrated equity, which may take the form of subordinated notes or an LP interest. Since the terms of fund interests often prohibit them from being pledged to secure a financing without the consent of the general partner ("GP") or investment manager of the relevant fund, the fund interests purchased by a CFO Issuer are often held in a subsidiary of the CFO Issuer ("Asset Holdco"). The assets of the Asset Holdco are not subject to a pledge or a security interest, but the equity interests of the Asset Holdco are pledged to secure the repayment of the debt and other obligations of the CFO Issuer.

The most senior tranche issued by a CFO Issuer will have the highest rating in such CFO. Each successive tranche will be more junior to, and have debt that is lower rated than, the immediately prior tranche. The most subordinated tranche will be an equity tranche. The returns on subordinated or equity tranches, in turn, can vary in line with gains or losses on the underlying investments. This tranched capital structure allows the investors in a CFO to determine their preferred risk/return investments.

Each tranche (other than the most junior tranche) has a seniority or priority over the other tranches, with "tighter" loan-to-value ("LTV") or similar collateral quality tests, which, if not satisfied, will result in the diversion of some or all available cash to pay down the principal balance of the rated tranches of each class of debt in the order of seniority until such LTV or collateral quality tests are satisfied, with the equity last in line in the so-called "waterfall" of repayment.

The proceeds of a CFO offering are used to finance the underlying fund investments, provide liquidity to the underlying funds, purchase more fund investments, seed new vintage funds and/or for any other permitted purposes.

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Originally published by GLI - Fund Finance 2026

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.