Investors tipped to take on key role in growth of CFOs

Sayed Kadiri

Editor

It’s early days in the renaissance of the market for collateralised fund obligations (CFOs), but market participants are looking forward to how the product will evolve.

In 2022 an estimated $8 billion of CFOs have priced (the underlying fund exposures vary greatly from deal to deal) and Dechert has been involved in about half of these in its capacity as manager counsel.

Thus far, asset managers have been the driving force behind CFO issuance, but Dechert partner John Timperio says investor-led CFOs could become prevalent. “We are starting to see more interest in transactions originated by large platforms that own LP [limited partner] interests,” he says.

“We expect the issuer base to evolve beyond asset managers”

John Timperio, Partner | Dechert

North Carolina-based Timperio gives an example of a transaction this year where an investor took a portfolio of roughly 100 LP minority interests in funds managed by third-parties and wrapped these into a CFO.

It can take months for such arrangements to come together, with investors seeking consents to hold interests in a CFO format. But Timperio is optimistic that as CFOs become a larger part of the fund investment universe, documentation will evolve to make this transfer seamless.

CFOs have increasingly been used to house credit assets (particularly private credit, as previously reported by Creditflux). For example, Dechert has worked on a CFO where the underlying exposure included CLO equity. Dechert partner Chris Duerden says one motivation is that an investor in a CFO whose collateral includes CLO equity may receive better capital treatment versus holding direct CLO equity exposure.

There is scrutiny on the types of funds that fit into a CFO. “The goal is not to throw every portfolio under the sun into a CFO,” he says. “In the build up to a launch, there is a lot of vetting of the underlying funds to ensure they meet rating agency requirements and investor risk appetite.”

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Global credit funds & CLO's

October 2022 | Issue 249

Published in London & New York.