Private equity firms are increasingly adopting sophisticated financial structures to attract investment from insurers, addressing a persistent slowdown in deal activity within the buyout sector. Fund managers specializing in secondary markets have expanded their use of collateralised fund obligations (CFOs) and have introduced more intricate tranching of net asset value (NAV) loans to accommodate investors with varied risk profiles.

According to Thomas Speller, co-head of funds ratings at Kroll Bond Rating Agency, there has been notable growth in structured debt designed to appeal to different types of investors since last year. This shift has contributed to the expansion of secondaries funds—vehicles that purchase stakes in mature buyout funds from investors seeking liquidity—by lowering their cost of capital. The reduced financing costs enable these funds to acquire additional interests in buyout portfolios or distribute returns to their own investors.

Both CFOs and tranched NAV loans segment obligations into senior and junior tranches. This division allows more risk-averse investors, such as insurance companies, to invest in the senior portions that typically carry higher credit ratings and lower risk but offer lower yields. Conversely, investors with higher risk appetites, including private credit funds, may take on the junior tranches, which have increased risk but potentially greater returns. A private credit executive noted that collaboration among private credit providers, insurers, and rating agencies has driven innovations in these financing approaches.

CFOs, which issue bonds backed by stakes in older buyout funds, are established instruments, but their issuance by private equity secondaries funds has surged significantly—from approximately $400 million in 2021 to an anticipated $6.5 billion in 2025, according to KBRA data. The more recent development has been the tranching of NAV loans, which are debts secured against the value of the secondaries funds’ holdings, structured to appeal to insurance companies by producing higher-rated senior notes.

These senior tranches are prioritized in receiving cash flows from underlying buyout funds, enhancing their attractiveness to fixed income investors, including insurers. Meanwhile, secondaries funds employ various forms of leverage to boost returns, with a growing reliance on CFOs to generate liquidity or fund new investments. For example, Blackstone has explored issuing a CFO based on more than $2 billion of stakes in leveraged buyout funds, while Franklin Templeton’s secondaries division recently completed a $1.5 billion CFO issuance.

Tranched NAV loans are similar to CFOs but differ primarily in collateral: NAV loans are secured against the secondaries vehicle’s stakes across hundreds of buyout funds, whereas CFOs are backed by the secondaries fund itself. Both structures have raised concerns because they add layers of leverage in addition to the often substantial debt already held by the underlying buyout portfolio companies, prompting some caution among market participants about the associated risks.