Private funds and structured finance professionals have been exploring innovative methods to reconcile fund managers’ interests in seeking new sources of capital with the mounting demand of insurance companies for investments in private funds. Two structures have emerged as leading solutions in addressing these needs: collateralised fund obligations (CFOs) and rated note feeders (RNFs).
CFOs essentially pool underlying funds into a special purpose vehicle (SPV), which subsequently issues notes backed by the vehicle’s assets. Conversely, RNFs are debt instruments which unique purpose is to facilitate direct investment into a single private fund by individuals or entities that want to invest large sums but seek better credit protection.
While the precise structure of each varies according to the specific requirements of the investors and the fund managers involved, they share a common goal. Both CFOs and RNFs offer a way for fund managers to tap into new sources of capital, while managing risk and meeting insurers’ stringent investment criteria.
Clearly, CFOs and RNFs present an appealing option for structuring investment into private funds. They offer a relatively low-risk investment vehicle which offers the potential for high returns, while at the same time maintaining hold periods and aiding in the management of unforeseeable tax complications.
With this in mind, it is important for all market participants to understand these financial instruments and to consider whether they might prove useful in their own investment and business strategies. For a complete and insightful overview consult the full article by Morgan Lewis on JDSupra.