Collateralised fund obligations (CFOs) do for private-fund interests what CLOs have long done for corporate loans. They pool a diversified portfolio of underlying assets into a special-purpose vehicle, then re-slice the resulting cash flows into tranches of debt and equity carrying different degrees of risk.
Once a niche instrument that all but disappeared after the financial crisis, the structure has returned with gathering pace. Annual issuance climbed toward $4 billion by 2022, paused briefly in 2023 as rising rates and uncertainty around proposed National Association of Insurance Commissioners rules gave insurance investors pause, and reached an estimated $20 billion to $25 billion in 2025, with some market participants projecting issuance of up to $30 billion in 2026.
The Cayman Islands is an important structuring, issuance and administration jurisdiction for CFOs. It provides bankruptcy-remote issuer vehicles, asset holding companies, and flexible company, partnership, and trust law that make CFOs practical to execute. As the underlying private credit and secondaries markets continue to expand, Cayman-domiciled structures are becoming more common.
What a CFO is and how it differs from a CLO
A CFO is a securitisation in which a portfolio of private-fund interests, usually limited partnership interests in private equity, private credit, real estate, infrastructure, hedge fund or secondaries vehicles, is placed into a special-purpose vehicle that issues layers of debt and equity to investors.
The underlying fund distributions, proceeds from asset sales and, in some structures, proceeds from selling fund interests outright are used to pay those securities through a contractual waterfall.
The technology is drawn heavily from the CLO market, and the two structures share a broadly similar tranched capital stack. This consists of senior notes designed to carry the highest credit rating, mezzanine or subordinated notes offering higher yields in exchange for greater risk, and an unrated equity or residual tranche that absorbs losses first but captures whatever cash remains once every other obligation has been paid.
This tranching does not eliminate the risks in the underlying portfolio. It redistributes them, concentrating first-loss exposure in the equity while giving more senior investors contractual priority over cash flows.
The critical distinction between CFOs and CLOs is the collateral itself. A CLO’s underlying loans generate contractual, scheduled interest and principal payments. A CFO is backed by fund interests whose cash flows are less predictable, with distributions depending largely on when underlying investments are realised or refinanced. A CFO therefore has to make scheduled payments on its debt even though the timing and amount of the cash flows supporting those payments can be uncertain. CFOs incorporate liquidity support, coverage tests and other structural protections to manage that uncertainty.
Some of the recent growth of CFOs is the result of a difficult exit environment, in which private-market managers may be reluctant to sell investments at unattractive valuations simply to generate liquidity. A CFO offers an alternative. Fund interests can be packaged into a securitisation and used to support the issuance of rated debt, allowing liquidity to be raised against the portfolio’s expected future cash flows without requiring an immediate sale of the underlying investments.
How a CFO is built
A typical CFO sponsor assembles a diversified pool of fund interests, such as an identified portfolio, a blind pool of commitments not yet finalised or some hybrid of the two, and transfers them, directly or indirectly, into an asset holding company.
Because limited partnership agreements frequently restrict the transfer, pledge or change in beneficial ownership of an LP interest, a CFO will often pledge the shares of the asset holding company itself rather than the underlying interests directly. However, general partner consent and transfer compliance are typically still required.
In many transactions, the issuer finances the portfolio by issuing senior secured notes, commonly 60% to 75% of the capital structure, mezzanine notes, roughly 10% to 20%, and subordinated or equity notes making up the remainder. Cash flows down through the tranches on each payment date according to a predetermined waterfall, with administrative expenses and liquidity-facility fees paid first, followed by interest on the notes in order of seniority, required principal amortisation and reserve funding, with equity receiving only the residual. The precise capital structure is transaction-specific.
Because the underlying LP interests carry no scheduled distributions, a CFO typically layers in several structural protections to manage the timing and variability of cash flows, They can be:
- A revolving liquidity facility, often sized at 10% to 15% of total issuance, which can bridge timing gaps between expected fund distributions and the CFO’s own payment obligations. Where the portfolio includes fund interests with unfunded commitments, the facility may also provide liquidity to meet future capital calls;
- Loan-to-value tests, which measure outstanding rated debt against the net asset value of the underlying portfolio. Where CLOs use overcollateralisation and interest coverage tests, a CFO instead monitors NAV, and a breach diverts cash away from equity to pay down rated debt and deleverage the structure;
- Liquid-asset or reserve requirements in some structures, requiring the vehicle to maintain cash, money-market investments or other readily realisable assets as an additional liquidity buffer; and
- Vintage staggering, combining more mature fund interests nearing their final distributions with newer investments still years from harvest, so that older vintages can generate distributions in the CFO’s early years while newer ones contribute later.
Where the structure permits reinvestment, the manager may for a specified period after closing recycle proceeds from realisations into new investments or commitments within agreed eligibility criteria, after which the structure moves into amortisation as underlying funds wind down.
The role of the Cayman Islands
The Cayman Islands is a structuring, issuance and administration jurisdiction for CFOs. Its role is to provide the legal and operational infrastructure and it has grown alongside the private credit markets that increasingly feed these transactions.
A Cayman CFO commonly uses one or more Cayman vehicles. These can include a bankruptcy-remote issuer, an asset holding company, and often an orphan structure whose shares are held by a Cayman trust, so the issuer sits legally outside the sponsor’s corporate group. These entities are typically constituted as a Cayman exempted company, exempted limited partnership or limited liability company, with the choice driven by the transaction’s tax and governance requirements.
Cayman company, trust and partnership law gives sponsors considerable flexibility to tailor the share-trust arrangements, contractual subordination, security package, limited-recourse and non-petition provisions that keep the issuer legally isolated from the sponsor’s own insolvency risk.
A Cayman securitisation vehicle is generally structured so that transaction counterparties contractually agree not to petition for its winding up, and Cayman’s status as a creditor-friendly jurisdiction with no Chapter 11-equivalent procedure supports that isolation in practice.
Because a non-insurance securitisation special-purpose vehicle is generally not required to be registered or licensed by the Cayman Islands Monetary Authority under any regulatory law, CFO issuers avoid an additional layer of prudential licensing that might otherwise slow execution. However, this does not place the structure outside compliance obligations. Cayman securitisation vehicles and their service providers remain subject to applicable anti-money-laundering, sanctions, beneficial-ownership and tax-information regimes, and CIMA guidance specifically flags the source of assets, investor profiles and the complexity of securitised products of this kind as risk factors warranting attention.
CFO-specific structuring issues also arise directly out of Cayman fund law. Where the originating private fund is itself Cayman-domiciled, its constitutional documents must be reviewed to confirm the securitisation will not trigger leverage limits or require the consent of the fund’s own limited partners. The relevant partnership agreement will also typically restrict transfers of partnership interests and require general partner consent, including where the transaction changes the economic rights associated with an interest.
Underpinning all of this is tax neutrality. Cayman generally imposes no income, corporation or capital gains tax at the entity level, helping to avoid an additional layer of Cayman tax within the structure. The tax treatment of the underlying funds, investors, transfers and distributions still has to be analysed under the law of each relevant onshore jurisdiction.
That combination of legal flexibility, creditor-friendly insolvency treatment, tax neutrality and specialist offshore counsel, fund administrators, trustees, listing agents and independent directors has made Cayman an important and increasingly widely used domicile as the CFO market has scaled alongside the broader growth of private credit.
Who invests, and why
Senior noteholders are typically insurance companies, banks, pension funds, sovereign wealth funds and other institutional investors with mandates for rated credit. Their attraction is access to private-market cash flows through a rated debt instrument rather than an unrated, illiquid LP interest. Structural subordination, the LTV cushion beneath them, liquidity support and diversification across multiple funds, vintages and strategies together allow a substantial portion of a well-constructed CFO to be issued as investment-grade debt.
For insurers specifically, the regulatory capital treatment can be a decisive factor. A rated CFO note may produce a more favourable risk-based capital outcome than holding the underlying fund interests directly, though the analysis is not automatic and depends on the applicable regime. In the US, the NAIC’s principles-based bond framework requires an assessment of whether the instrument genuinely redistributes credit risk through substantive subordination, liquidity support and overcollateralisation rather than merely relabelling it.
For Cayman insurers and reinsurers, the analysis is different. Insurers must be able to identify, measure, monitor, manage and report the risks of their investments, with valuation, concentration, governance and the fit between assets and liabilities forming part of the prudential assessment. A credit rating therefore does not, by itself, determine the treatment of a CFO investment.
Mezzanine investors are specialist credit funds, hedge funds, structured-credit managers and family offices that will accept more cash-flow and loss risk than senior noteholders in exchange for a materially higher coupon, while still sitting above the equity layer.
The equity tranche is generally held by the sponsor itself, a private-markets or structured-credit investor, or occasionally an investor seeking leveraged exposure to private-market upside. Because equity receives only the residual after every other obligation is met, its returns can be highly leveraged in both directions, and its economics sit closer to a levered private-markets portfolio than to a conventional fixed-income investment.
For sponsors, a CFO can serve several purposes at once. Most importantly in the current environment, it can generate liquidity from a portfolio of otherwise illiquid fund interests without requiring an immediate sale of those interests or the underlying investments at potentially unattractive valuations. It can also broaden the investor base beyond those willing to buy a direct LP interest, secure longer-term financing than a bilateral NAV facility typically offers, and diversify cash flows and losses across multiple funds, strategies, geographies and vintages.
Issuance by private equity secondaries funds specifically has grown from just over $400 million in 2021 to $6.5 billion in 2025, according to KBRA, and Blackstone has explored a CFO against more than $2 billion of its own leveraged buyout fund stakes.
What allocators are watching
The structure has drawn some scrutiny. As CFOs have moved from a niche institutional tool toward mainstream use, some limited partners have begun to monitor what securitisation means for their own position. Many partnership agreements permit a general partner to create or participate in a CFO without explicit LP approval, and where the sponsor retains the equity tranche, it also gives that sponsor a leveraged exposure to fund performance that can shape decisions around when to exit positions.
A related concern is valuation. CFO leverage covenants are typically tied to the NAV of the underlying funds, and those NAV calculations ultimately depend heavily on valuations of underlying private assets, creating additional sensitivity around valuation methodology and reporting.
None of this has slowed the structure’s growth. For institutional buyers of senior notes, a well-constructed CFO can offer investment-grade-rated exposure to diversified private-market cash flows, with defined seniority protections through a rated instrument.
The due diligence required, particularly for junior and equity tranches, is more intensive than underwriting the underlying funds directly, but the appeal to both sponsors seeking liquidity and financing, and to institutional investors seeking rated, capital-efficient access to private markets, shows no sign of fading.
Conclusion
A CFO converts a portfolio of otherwise illiquid private-fund interests into a capital-markets instrument spanning senior, mezzanine and equity risk. For sponsors, it provides a means of raising liquidity against the expected future cash flows of a private-market portfolio without necessarily having to sell the underlying fund interests or force realisations at an unattractive point in the market. For institutional investors, it provides differentiated, often rated access to private-market exposure.
The economic risk in that structure remains rooted in the underlying funds, including uncertain and delayed distributions, valuation risk and transfer restrictions. Where the portfolio contains unfunded commitments, future capital calls introduce an additional liquidity requirement that the structure must be able to meet. And the relevant onshore regulatory and tax analysis remains essential in every transaction.
What the Cayman Islands supplies is the legal and operational platform of bankruptcy-remote vehicles, flexible company, partnership and trust law, and a deep ecosystem of specialist service providers built specifically around structures of this kind. As the underlying private credit and secondaries markets continue to grow, that platform looks set to remain an important choice for CFO structuring.
