Collateralized fund obligations (“CFOs”) have garnered attention recently, becoming increasingly popular within the fund finance market as a way to generate liquidity. CFOs have several benefits, as we explained in a previous Legal Update, but that does not mean they are not without risks or complications. In this Legal Update, we share some of the considerations for fund general partners and limited partners when engaging in a CFO transaction.

Background

Collateralized fund obligations (“CFOs”) have garnered attention recently as they gain popularity within the fund finance market as a way to generate liquidity. A fund sponsor—typically the general partner (“GP”) of a fund—can bundle various fund interests and raise capital by using them as collateral without selling the fund interests to third parties. Limited partner (“LP”) investors are also attracted to CFOs because the vehicle provides access to a bundled pool of investments with an enhanced credit rating and can also be used to manage market volatility in existing portfolios of private equity exposures.

What GPs and LPs Need to Know

What Are Considerations for GPs?

• Does the transaction’s timing align with the required representations? Fund LPs (including the CFO Issuer or its subsidiary) must make various representations regarding compliance with securities laws, anti-money laundering laws, and Know-Your-Client standards. However, CFOs may not have the status to make certain of these representations until the CFO has issued funded liabilities or has acquired the LP interests, so the timing of these representations by the CFO Issuer or its subsidiary should be considered to confirm that they are accurate when made.
• Are subscription credit facilities involved? If the underlying funds do not have subscription lines in place to cover capital calls, the GP should consider requiring LPs transferring their interests to agree that they will cover any defaults of the new...