More on private equity CFOs

Collateralized financial obligations (CFOs) use the CDO/ CLO device to securitise investments in private equity, hedge funds or similar non-debt-type investments. The typical structure of a private equity securitization is by owners of limited partnership interests in private equity funds transferring their interests in those funds to a special purpose vehicle, or SPV. The SPV then issues debt type securities. These obligations of the SPV are backed by financial assets, hence the term CFO.

One of the first rated private equity securitization deal was Prime Edge.

Hedge fund investments and private equity investments are investments in equity-type instruments. By repackaging such investments into debt securities, CFOs create debt out of equity.

The hedge fund industry itself has grown rapidly over the past 10 years or so. Securitization of hedge fund investments seemed like a brilliant idea, a bit outlandish at once, but now it seems there are several transactions. It is certainly a new flavour in the structured finance market, but it seems it is here to stay at least for a while.