CFOs stage comeback as fundraising tool for managers

Sayed Kadiri

Editor

Collateralised fund obligations are coming back into fashion, with Churchill Asset Management the latest firm to launch such an offering after announcing a $700 million deal last month.

CFOs have been around for close to two decades, but the asset class is not investor-led, as it used to be.

UBS’s global head of permanent capital solutions, Carlos Alvarez, says old-style CFOs were a result of insurance companies wanting to wrap their fund exposures into a securitisation for capital efficiency. Although insurance companies remain a key part of the investor base, the universe of CFO issuers has expanded lately.

“CFOs are predominantly asset manager-driven these days,” says New York-based Alvarez. “Issuers find they can use these structures to commit capital to their new funds. From this perspective, the CFO is almost a fundraising tool.”

These CFOs are more or less fully funded, with asset managers primarily allocating the proceeds to existing strategies.

UBS has arranged four CFOs in the past 18 months, including the Churchill transaction.

“CFOs are asset manager-driven these days”

Carlos Alvarez, Global head of permanent capital solutions | UBS

The transactions are private, but generally consist of an equity tranche (usually significantly supported and in some cases fully retained by the issuer), which occupies 25-35% of the capital structure. Rated notes sit above this, either as a single class of debt, or in up to three tranches.

“CFOs utilise CLO technology in their structure as well as in the debt capital markets syndication process,” says Chris Freeze, head of investor relations at Churchill Asset Management.

The senior-most tranche typically carries a low single A rating and a second debt class would be rated around triple B. These ratings appeal to insurance companies, but other institutions are participating.

“There is growing interest from fixed income investors as the coupon tends to be higher than similarly-rated products,” says Alvarez.

He adds that credit managers are eyeing CFOs and they are ideally placed to raise them.

“Private equity funds, by nature, tend to have a handful of concentrated investments and carry a lot of underlying leverage, which is not an ideal situation,” he says.

“But credit funds tend to run diverse portfolios and this sits well in a CFO. There is a healthy degree of interest from credit managers across private credit and through to liquid credit.”

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Global credit funds & CLO's

August 2022 | Issue 248

Published in London & New York.