Collateralized Fund Obligation


Collateralized Fund Obligation

A Collateralized Fund Obligation or (CFO), in finance, 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 available to the rating agencies in analying the underlying private equity investments is typically less comprehensive than what would be available in securitizations of other securities, including corporate bonds and mortgage-backed securities. Leverage levels vary from one transaction to another although leverage of 50–75% of the net assets of portfolio has historically been common.

The various CFO structures that have been executed in recent years have had a variety of different objectives, and, as a result, the structures involved have differed. These differences tend to relate to the amount of equity sold through the structure as well as to the leverage levels.

Private Equity CFOs

Since the advent of CFOs (ca. 2002), 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 completed $810 million securitization of a portfolio of 46 private equity funds [ [http://www.asiasentinel.com/index.php?Itemid=32&id=613&option=com_content&task=view Singapore’s Temasek Hits Hard Going] (Asia Sentinel, 2007)]

*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). [ [http://www.svgcapital.com/svgadvisersprivate/svgdiamondprogramme/ SVG Diamond Programme] ] [ [http://www.altassets.net/news/arc/2006/nz8230.php SVG Diamond II raises €500m for private equity investment] ]

* Tenzing (2004) — Securitization of private equity fund assets by Invesco

* Pine Street (2003) — Securitization of private equity fund assets by AIG

* Silver Leaf (2003) — Securitization of private equity fund assets by Deutsche Bank

ee also

*Collateralized mortgage obligation
*Private equity secondary market
*Private equity fund
*Hedge fund

References

* [http://www2.standardandpoors.com/spf/pdf/fixedincome/CFO_final.pdf?vregion=us&vlang=en Rating Private Equity CFOs: Stochastic Market Cash Flows]
* [http://www.capdyn.com/publications/securitising-private-equity.pdf Securitizing private equity]

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