Collateralized fund obligation
financial instrument similar to a collateralized debt obligation
A collateralized fund obligation (CFO) is a form of securitization involving private equity fund or hedge fund assets, similar to collateralized debt obligations. CFOs are a structured form of financing for diversified private equity portfolios, layering several tranches of debt ahead of the equity holders.
The data made available to the rating agencies for analyzing the underlying private equity 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. 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 (c. 2002), there have been only a handful of publicly announced private equity securitization transactions.
Begin with the source’s own compact description: “Collateralized fund obligation” is financial instrument similar to a collateralized debt obligation. The dossier treats that line as a proposition to test through Collateralized, fund and obligation, not as a finished interpretation.
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