- Private equity groups are deploying increasingly complex structured financing—collateralized fund obligations (CFOs) and tranched net asset value (NAV) loans—to attract insurance capital and alleviate dealmaking drought for buyout funds. CFO issuance by PE secondaries funds has soared from just over $400mn in 2021 to $6.5bn in 2025, according to Kroll Bond Rating Agency. Blackstone explored issuing CFO on $2bn+ of stakes in leveraged buyout funds; Franklin Templeton’s secondaries arm raised $1.5bn CFO in August. Structures slice obligations into junior and senior pieces, allowing risk-averse insurers to take safest portion at lower cost while higher-risk investors take junior slice.
- Both CFOs and tranched NAV loans are secured against PE fund portfolios. CFOs issue debt backed by stakes in ageing buyout funds; tranched NAV loans are secured against secondaries vehicle’s own stakes in hundreds of buyout funds. Senior tranches receive cash flows first and carry higher ratings (AAA/AA-equivalent), appealing to fixed-income investors including insurers. The tranching phenomenon is more recent; “From last year going into this year, we’ve seen more structured debt designed to attract investors with different risk tolerances.” Secondaries managers use leverage to generate returns, buy more stakes, return cash to backers.
- Controversy surrounds leverage-on-leverage structures: underlying buyout portfolio companies already carry significant debt, and secondaries vehicles are adding debt on top. Banks have been “lowering capital charges by selling risky portion of NAV loans” to private credit firms; this year “a handful” of secondaries funds started tranching their own debt to bring in insurers directly. JPMorgan, Société Générale, and private credit firms like Blackstone and Ares extend NAV loans to secondaries funds. Tranching allows secondaries funds to borrow more, per sources.
- The structures help fuel secondaries boom by lowering cost of capital and enabling fund managers to generate liquidity during prolonged PE dealmaking drought. “The evolution of what you can do in this space has developed so much because of private credit, insurance, rating agencies,” per top private credit executive. Growth of structured secondaries debt has accelerated dramatically—6.5x growth since 2021—as insurance capital increasingly seeks yield in complex PE vehicles. Risk concentration in secondaries funds could amplify losses if underlying buyout portfolio deteriorates.
What Happened?
Private equity groups increasingly use collateralized fund obligations (CFOs) and tranched net asset value (NAV) loans to attract insurance capital to secondaries funds. CFO issuance by PE secondaries funds soared from $400mn in 2021 to $6.5bn in 2025. Blackstone explored issuing CFO on $2bn+ of LBO fund stakes; Franklin Templeton’s secondaries arm raised $1.5bn CFO in August. Structures slice debt into senior (higher-rated, lower-yield) and junior (lower-rated, higher-yield) tranches, allowing insurers to take safest portion. Tranched NAV loans secured against fund stakes are more recent innovation; “handful” of secondaries funds tranching debt this year. Banks (JPMorgan, Société Générale) and private credit firms (Blackstone, Ares) extend NAV loans; tranching allows secondaries funds to borrow more.
Why It Matters?
For Blackstone, Franklin Templeton, and Ares shareholders, structured financing lowers cost of capital for secondaries operations, improving returns and enabling more stake purchases during dealmaking drought. For insurance company investors, tranched CFOs and NAV loans offer attractive yields with senior tranche credit quality ratings, addressing yield-starvation from lower bond yields. For JPMorgan and bank shareholders, increased NAV loan tranching activity could expand lending opportunities and improve profitability (banks have been offloading risky portions). For PE investors in underlying buyout funds, the addition of secondaries-level debt on top of existing leverage creates concentration risk—leverage-on-leverage structures could amplify losses if portfolio deteriorates. For financial regulators, the rapid growth of opaque structured finance vehicles targeting insurance capital raises systemic risk concerns.
What’s Next?
Monitor CFO issuance volumes; if tranching continues at current pace, it could signal PE secondaries platforms racing to lock in insurance capital before rates decline. Track Kroll and other rating agencies’ scrutiny of CFO structures; if ratings downgrades accelerate, it could reduce investor appeal and slow issuance. Watch insurance company earnings for exposure to CFOs and tranched NAV loans; if insurers increase allocations, it validates yield-seeking thesis but also concentration risk. Monitor rating agency capital charge changes for banks; if capital requirements increase for NAV loan origination, it could reduce lending supply. Track secondaries fund performance; if underlying LBO returns deteriorate, tranched debt structures could trigger defaults and mark-to-market losses across capital stack. Also watch regulatory commentary; if financial regulators express concern about leverage-on-leverage in PE structures, it could prompt capital requirements or lending restrictions.
Affected Tickers & Coins: BX, BEN, ARES, JPM, GLE
Source: Financial Times
