The market for private equity (PE) collateralised fund obligations (CFOs) continues to gain traction post-financial crisis, according to Fitch Ratings. Since the first post-financial crisis CFO deal came to market in 2014, five transactions with a face value of USD3.4 billion have been issued.
“The resurgence of the PE CFO market coincides with the growth of the secondaries market for PE interests overall,” says Greg Fayvilevich, Senior Director, Fitch Ratings. “Insurance sponsors, secondaries funds, and various limited partners are increasingly looking to PE CFOs for regulatory capital relief, alternative funding sources, PE portfolio management or to generate liquidity.”
PE CFOs involve selling fund interests into a bankruptcy-remote special purpose vehicle that issues tranches of debt and equity to fund the acquisition of these interests. Similar to other forms of securitisation, PE CFOs are also supported by over-collateralisation tests and cash diversion mechanisms in the event of underperformance.
Fitch notes some differences between pre- and post-crisis PE CFO deals coming to market. Post-crisis deals have generally been more conservative, with the equity portion averaging 46 per cent of post-crisis capital structures compared to 31 per cent for pre-crisis deals. The senior-most tranches of post-crisis transactions have been rated ‘A’ versus initial ratings of ‘AAA’ on pre-crisis transactions.
“Continued PE CFO issuance could provide an alternative to PE secondaries for investors seeking to manage their PE portfolios, whether by adding or removing risk, or by rebalancing exposures,” adds Fayvilevich.
