Private equity turns to financial engineering to lure insurance billions
Structured financing helps fuel growth of secondaries funds by making investments more attractive to risk-averse investors
Private equity groups are turning to increasingly complex financing structures to allow cash-rich insurers to invest in their debt, helping alleviate a prolonged dealmaking drought for buyout funds.
Fund managers in one niche of the sector have increased their use of collateralised fund obligations (CFOs) and have started slicing and dicing another type of debt, net asset value loans, to appeal to investors with a broader range of risk appetites.
“From last year going into this year, we’ve seen more structured [debt] designed to attract investors with different risk tolerances,” said Thomas Speller, co-head of funds ratings at Kroll Bond Rating Agency.
The structures have helped fuel the rise of secondaries funds — specialist vehicles that have been buying cash-strapped investors’ stakes in mature buyout funds, giving the investors an exit during a dealmaking drought — by helping lower their cost of capital. In turn, that allows the secondaries fund to buy more stakes in buyout funds, or to return money to its own backers.
Both CFOs and tranched NAV loans — debt backed by the value of the secondaries fund’s holdings — slice obligations into junior and senior pieces.
That allows more risk-averse investors such as insurers to take the safest portion at a lower cost to the borrower and those with a higher risk tolerance, such as private credit funds, to take the junior slice.
“The evolution of what you can do in this space has developed so much because of private credit, insurance, rating agencies,” said one top private credit executive.
CFOs — which issue bonds backed by stakes in ageing buyout funds — are well-established structures. But issuance by private equity secondaries funds has soared in recent years, from just over $400mn in 2021 to $6.5bn in 2025, according to KBRA.
The phenomenon of tranching secondaries funds’ net asset value loans to target insurers is more recent, however, Speller and the private credit executive said.
“The senior note will have a higher rating that will appeal to fixed-income investors including insurance companies,” said Speller. The senior tranches receive cash flows from the underlying buyout funds first.
Secondaries funds use various forms of leverage to generate returns but have recently leaned more on CFOs to generate liquidity or raise money for further purchases.
Blackstone explored issuing a CFO to generate cash on more than $2bn of stakes it held in leveraged buyout funds, the FT reported in June, and in August Franklin Templeton’s secondaries arm finished raising a $1.5bn CFO.
Tranched NAV loans are similar to CFOs but are secured against a secondaries vehicle’s own stakes in hundreds of buyout funds, while CFOs issue debt secured against a secondaries fund itself.
Both structures controversially add leverage on leverage, because the underlying buyout portfolio companies already often hold significant debt.
Secondaries managers tend to take out NAV loans to return cash to their own backers, buy more fund stakes or for general working capital, three investors said.
Tranching the loans could allow secondaries funds to borrow more, said another person who studies the loans.
The credit executive said that for the past few years some banks had been lowering their capital charges by selling a risky portion of NAV loans they had extended to private credit firms. Private credit lenders such as Blackstone and Ares, and many banks including JPMorgan and Société Générale, extend NAV loans to secondaries funds.
But this year, a “handful” of secondaries funds had started tranching their own debt to bring in insurers, he said.