Demand for Collateralized Fund Obligations Surges Amid UK Solvency II Reforms

Private capital firms are hoping to unlock demand from U.K. insurers for collateralized fund obligations, or CFOs, by structuring them to be eligible for the so-called “matching adjustment,” according to market sources.

U.K. and European insurance firms have historically been limited in their ability to invest in CFOs, a technology that applies a CLO-like structure to private market funds, by restrictive EU regulation under Solvency II.

But following changes to the framework in the U.K. last year, several asset managers are working on CFOs designed to be capital efficient for U.K. insurance companies, market sources told Octus.

Their efforts are facilitated by the same reforms that allowed Ares Management to sell the first reinvesting European middle-market CLO to the U.K.-based insurer Legal & General.

The original matching adjustment criteria under Solvency II, which are still applicable in the EU, rewarded insurance firms for holding assets with “fixed” cash flows that closely match their liabilities, effectively barring most conventional securitizations. Last year, the U.K. extended matching adjustment benefits to include assets with “predictable” cash flows.

A CFO securitizes illiquid fund interests, such as private equity stakes or secondaries. Since cash flows from private capital funds tend to be tied to events rather than a schedule, the vehicle itself needs certain features to provide predictable cash flows to insurers.

“There is a lot of work being done to create structures that would be matching adjustment-eligible,” said Pierre Maugüé, partner at Debevoise & Plimpton in London. “It’s the big project of 2025.”

One way to create a predictable income out of a pool of unpredictable assets is a long maturity with a fixed repayment schedule at the end.

“CFO notes normally have a short maturity of around 12-15 years,” said Maugüé. “Structures designed to be matching adjustment-eligible often contemplate bonds with a maturity of 20 years or more.”

In March 2025, Churchill Asset Management, an affiliate of Nuveen, closed NPC SIP 2024-1, a $750 million CFO. The deal was structured as a 30-year bond with a reinvestment period of 25 years.

It also contains an investment bucket for zero-coupon U.S. Treasuries. These assets will produce the cash flow to repay the notes at maturity.

Churchill’s deal further included a $70 million liquidity facility. A spokesperson for Churchill declined to comment.

The firm also issued a middle-market CLO structured for matching adjustment compliance last month.

CFOs Go Europe in 2025

CFOs have existed since the early 2000s but only experienced a boom recently.

“Issuance has really taken off since the end of 2024,” said Richard Sehayek, co-head of European alternative credit at Ares Management in London. “For the first time in our experience, we are now seeing multiple transactions being done at the same time.”

The surge in CFO volumes has been especially notable in the U.S. In 2024, KBRA rated 14 transactions with a total value of $7.8 billion. In the record year 2022, the agency rated 25 transactions worth $13.1 billion, more than in the previous four years combined.

European sponsors are catching up this year. “A significant proportion of deals are being done by European GPs,” Sehayek said.

In April, London-headquartered private capital firm Coller Capital raised a $2.4 billion CFO in partnership with Ares and Barings, one of the largest deals of this kind in history, to invest in private equity and private credit secondaries. Debevoise & Plimpton were involved in Coller’s deal.

“As volume has risen in the U.S., European market participants are increasingly looking to get involved as they seek the same benefits U.S. market participants do,” said Kate Luarasi, partner at Kirkland & Ellis in Boston.

Pricing varies between structures, and liabilities can pay fixed or floating rate coupons. On average, one law firm told Octus that the CFOs it worked on this year came with a cost of debt of SOFR+295 bps.

The collateral tends to be geographically diversified. An investor estimated that they are on average exposed to roughly 60% U.S., 30% European and 10% Asian assets.

The investor base is similar to that of CLOs and other fixed-income assets. U.S. insurance companies are the main buyers of senior CFO tranches, usually rated single-A. The equity is commonly retained by the issuing GP, sometimes with co-investors. Mezzanine tranches can be bought by senior or equityholders, or on their own by opportunistic investors such as hedge funds.

“The U.S. market is much deeper, as you’d expect,” said Nick Shiren, partner at Cadwalader, Wickersham & Taft in London. “But we’re seeing growth in demand from Europe year-on-year.”

With the growth of the asset class comes a diversification of deal features. Some CFOs are in the works with capital structures even closer to that of a CLO, designed around regulatory capital rules for European banks, a source with knowledge of the matter told Octus.

While the relaxation of Solvency II rules only benefits U.K. insurers for now, anticipated reductions in capital charges for EU insurance firms should also drive demand, market participants said.

Investor education is a headwind in expanding the buyer base. A lawyer told Octus that the participation of European insurers compared to their U.S. counterparts is “miniscule” in part because they are not aware of the opportunity.

GPs’ Hunger for Liquidity

For sponsors, CFOs can serve as a fundraising tool for new private equity and credit funds, and provide liquidity for existing fund interests as higher interest rates make raising LP financing more difficult.

“From the GPs’ perspective, it’s key to have as much liquidity in the market and open your funds up to as big an investor base as possible,” said Matthew Worth, partner at Cadwalader in London. “Private equity in particular is hungry for liquidity. The growth in CFOs is a manifestation of that.”

The recent boom can be in part explained by a number of underlying funds coming to a point in their life cycle where they are ripe for a refinancing, market participants said. Issuance volumes are expected to remain elevated.

“We have a number of sponsor clients looking to raise their next flagship fund after the summer and using a CFO transaction for the first time,” said Suril Patel, partner at Kirkland & Ellis in London.

CFO transactions are complex and the structures are tailored to the needs of their investors, since the deals are often privately placed with a small number of buyers. As a result, CFOs tend to be relatively big to justify the associated costs, with many deals approaching or exceeding $1 billion, according to Patel.

The large size of the transactions makes them a cost-efficient fundraising instrument. “You tend not to do regular fund financing at the scale of the CFOs,” said a lawyer who has worked on several CFOs this year. “The ability to blend the underlying secondary positions into a large pool and raise capital against it means that you can get a better cost of funding than you would otherwise have.”

The increased demand for CFOs has not come at the expense of other fund financing tools, lawyers said.