(Bloomberg) -- More money managers are bundling private fund stakes into complex debt deals, according to executives at Evercore Inc., as liquidity and fundraising pressures across Wall Street drive investors to look at the once-niche instruments.
The market for so-called collateralized fund obligations could top $30 billion of new volume this year, up 50% from last year, according to Ahmet Yetis, a senior managing director in Evercore's private capital advisory group. Evercore has a hand in structuring many of these deals, giving it unusual visibility into the otherwise highly opaque market.
The surge likely reflects pressure on alternative asset managers to find ways to return liquidity to their investors and raise money for new funds, according to Nigel Dawn, the group's global head. A deal rut that's now lasted several years has deprived managers of profits, fueling the growth of secondary markets and making it harder to raise money from traditional investors.
CFOs are a type of securitization that bundles shares of private capital funds — a form of equity — into one or more pieces of debt. That transformation opens the door for fund managers to bring in money from fixed-income investors, such as insurance companies, that wouldn't otherwise be able to invest because of the risk.
Asset managers including Carlyle AlpInvest, Ares Management Corp., Dawson Partners, Coller Capital and Blackstone Inc. have raised capital through such CFOs. Smaller managers are also beginning to tap the market, including Star Mountain Capital, which looked to raise about $500 million last year.
CFOs are closely related to another form of debt called a rated feeder note, which funds set up to gather capital from insurers, some of the deepest pockets on Wall Street. That can ease the pressure to raise money from retail investors, whose emerging role as a major new source of capital for private markets has come into question recently.
"Institutions often take longer views," said Jeff Stern, partner at law firm Reed Smith. "The rise of rated feeders and CFOs is an extension of the movement of private credit in the direction of institutional investors."
Different Structures
As the deals become more popular, they're also becoming more complex. Apollo Global Management Inc. this month unveiled a series of novel securitizations that raised at least the possibility for conflicts of interest due to its multi-faceted nature, market investors told Bloomberg.
Credit secondaries managers also are stepping in.
"As both an investor in and recent issuer of CFOs, we believe the market will continue to develop strongly with increased innovation in portfolio construction, structuring and investor appetite," said Rick Jain, global head of private credit at Pantheon, an asset manager that invests in areas like private equity and infrastructure.
While AlpInvest and Dawson Partners have raised capital for their new funds through the CFO structure, others are using it to raise debt and equity against their illiquid assets, which enables them to add leverage and juice returns.
This month Pantheon bundled a mix of private equity assets, including stakes in secondaries funds, co-investment strategies and a seeded private equity portfolio into a $1 billion CFO that exceeded an original target of $750 million.
Most firms have raised CFOs for their secondaries or credit funds, which tend to have highly diversified assets. Carlyle recently arranged a similar structure for its private equity funds by bundling stakes from various flagship buyout funds into an $8.5 billion structured credit deal, resulting in a $5 billion infusion into its next buyout fund.
"As the market evolves, CFOs will become more efficient and lend themselves to newer structures," Yetis said.
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