Structured Stillness: Private Credit’s Desperate Bid for Liquidity
The Allocator Playbook: 30 Private Conversations With Capital in Motion
Our definitive playbook—featuring rare, in-depth conversations with the world’s most powerful allocators, from sovereign wealth funds to leading fund-of-funds—has been released. Some of these investors have never spoken publicly, not even to the top financial media.
It went live last week and is now being delivered to those who reserved early access in batches.
If you haven’t secured your copy yet, this is your final window to do so.
A new chapter in the evolution of private markets liquidity engineering is unfolding through the rapid emergence of Collateralised Fund Obligations (CFOs)—an instrument whose time may have come, not through market exuberance, but through systemic liquidity need. What we are witnessing is the quiet but accelerating financialisation of illiquid private credit exposures, packaged and transacted in the capital markets under the guise of structured efficiency. To the discerning observer, this development mirrors, in intent if not in precise structure, the early stages of the CLO 2.0 evolution post-2009 and the more controversial CDO-squared mechanics of the pre-crisis era. But the substrate is different: this time, it is private credit portfolios, not broadly syndicated loans or ABS tranches, that form the raw material.
At its core, a CFO is the securitisation of limited partnership (LP) interests in a range of private capital funds—spanning private credit, private equity secondaries, and occasionally infrastructure or real asset vehicles. The mechanics are deceptively straightforward: an arranger (in Coller Capital’s case, Citigroup and Wells Fargo) aggregates a diversified pool of LP stakes, often seasoned and cash-flow generative, and repackages them into a tranched debt-and-equity capital structure. Senior tranches receive priority cash flows, supported by the underlying fund distributions; junior tranches absorb first losses, much like equity in a CLO. The resulting security is sold into the structured credit and insurance markets, where it satisfies an appetite for yield, diversification, and capital-efficient exposure to alternative assets—especially for institutions facing Solvency II or NAIC risk capital charges.
The recent $2.4 billion CFO issuance by Coller Capital, followed by an additional $1 billion now in the structuring phase, demonstrates both the scale of market demand and the supply of underlying assets seeking liquidity. Investors such as Barings and Ares Management are participating not just as opportunistic buyers, but as strategic capital partners filling the void left by traditional exit channels. This activity must be viewed in the context of a sharply decelerating private markets exit environment: IPO markets remain weak, M&A volumes are down, and sponsor-to-sponsor deals have thinned. As a result, GPs are deferring exits, leaving LPs with longer-than-expected capital lock-ups and creating a secondaries market overflowing with supply.
One critical nuance here is that the underlying fund interests are themselves diversified pools of credit risk, not directly originated loans. This is not a simple repackaging of middle-market loans akin to CLOs; it is a securitisation of fund-level cash flows—a second derivative of the credit risk itself. The CFO holder is exposed to the performance of multiple underlying managers, geographies, sectors, and vintages, all of which introduce layers of correlation and complexity that are poorly understood outside specialist circles.
What differentiates this market from traditional CLOs is both the funding dynamic and the liquidity motive. Where CLOs finance primary loan origination and arbitrage the spread between loan coupons and liability costs, CFOs are fundamentally about providing liquidity to funds and LPs who otherwise cannot exit their positions. The securitisation is, in effect, a liquidity release valve for the private markets system, one that allows secondary buyers (Coller, Pantheon, Partners Group, et al.) to scale their balance sheets without waiting for primary fund exits. This suggests that, structurally, CFOs are less about enhancing credit creation and more about managing liquidity mismatch risk in a locked-up private capital universe.
There is, however, a more concerning dynamic at play. The proliferation of CFOs, coming alongside record private credit secondaries fundraises (Coller’s $6.8 billion, Pantheon’s $5.2 billion, Allianz’s €1.5 billion, Generali’s $1 billion RAIF), points to an industry increasingly reliant on financial engineering to generate liquidity rather than organic portfolio cash flows or asset disposals. While one could argue that secondaries provide a healthy market-clearing mechanism, the rapid growth of structured solutions such as CFOs suggests that the scale of liquidity needs far exceeds what traditional secondaries capital can absorb.
Our readers would understand that this is the archetypal late-cycle phenomenon: liquidity begetting liquidity, rather than cash flow repaying capital. The private credit market, once hailed as the stable, floating-rate hedge against rising rates, is now facing the first real test of its illiquidity premium. Rising defaults in sub-investment-grade corporates (particularly in U.S. middle-market loans and sponsor-backed European SMEs), refinancing pressures, and valuation uncertainty are driving LPs to sell, not because of strategic repositioning, but because they are forced by denominator effects, internal liquidity mismatches, and capital calls from other parts of their portfolios.
The Allocator Playbook: 30 Private Conversations With Capital in Motion
Our definitive playbook—featuring rare, in-depth conversations with the world’s most powerful allocators, from sovereign wealth funds to leading fund-of-funds—has been released. Some of these investors have never spoken publicly, not even to the top financial media.
It went live last week and is now being delivered to those who reserved early access.
If you haven’t secured your copy yet, this is your final window to do so.
Furthermore, the deployment of CFOs raises fundamental questions about risk transmission. Rated senior tranches of CFOs, typically BBB to A range, are attractive to insurers and pension funds seeking capital-efficient exposure. But in stress scenarios—particularly if underlying fund cash flows deteriorate or secondary market prices decline—tranche subordination could erode rapidly, and liquidity for these structured notes could evaporate, leaving holders with exposure not dissimilar to mezzanine private credit, but with the added complexity of fund-level correlations and exit uncertainties.
The next layer of concern is market depth. With secondary funds now raising tens of billions, and with CFO issuance volumes accelerating, the capacity of the secondary market to absorb further distressed sales is limited. Should macro conditions deteriorate (further rate volatility, global trade tensions worsening post-U.S. tariffs, geopolitical shocks), the secondary pricing levels could gap down sharply. Unlike primary credit markets, where market-makers and dealer inventories provide some (albeit diminished) liquidity buffer, private market secondaries and CFO tranches rely on periodic auction processes or private bilateral negotiations. Liquidity, in such a scenario, is highly discontinuous.
We should also recognize the macro implications. This proliferation of liquidity management solutions in private credit mirrors broader global market tensions: central banks are shifting dovishly amid growth headwinds; trade friction is squeezing global cash flows; and sovereign and corporate debt piles remain high. In such an environment, the funding fragility exposed by CFO issuance is not a peripheral phenomenon—it is an early warning of potential dislocation in private markets, one that could spill over into public credit when risk premia finally reprice.
The institutionalisation of private credit was always going to lead to its securitisation. What is critical now is whether this securitisation reflects healthy innovation or desperate liquidity engineering. For now, the market appears willing to absorb CFO paper, pricing it as a yield-enhancing, capital-efficient alternative to direct private credit exposure. But should
defaults rise, or should underlying fund returns disappoint, the risks embedded in these structures could manifest quickly—and with limited warning.
In sum, the CFO market sits at the intersection of market structure innovation and systemic liquidity risk. For allocators and macro investors, it presents both a potential yield opportunity and a flashing indicator of stress in the foundations of the private capital world. The question is not whether these structures are viable in calm markets—they clearly are—but whether they will survive the first real private credit cycle downturn.
On current evidence, the cracks are already forming.
As always, thank you for reading.
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