CFOs have become an increasingly popular alternative investment vehicle. They offer a way for portfolio investors, secondary funds, and funds of funds to layer their investment strategy with investments that have enhanced credit ratings, favorable returns, and diversified collateral. Although CFOs have a complex structure, they offer several benefits.

What to Know About the Benefits of CFOs

Among the main advantages of CFOs are:

1. Diversification of financing sources.
   Because the CFO issuer issues bonds with varying risk and return profiles and acquires interests in several funds, portfolios, and funds of funds, fund sponsors and investors can maximize diversification of funding and financing sources.
2. Bespoke structures and terms.
   The specific terms and structure of the CFO can be tailored to accommodate the needs of the fund investors and CFO issuer. Since there is no one-size-fits-all approach to CFOs, the CFO can be designed in a way that is most likely to be successful and take into account any specific regulatory, capital and/or tax requirements of the CFO issuer or investors.
3. Alternative to financing in bank markets.
   With a CFO, fund investors can realign their portfolios by freeing up capital for additional investments with preferred sponsors or rebalancing their portfolios to desired investment styles, industries, or vintages.
4. May offer advantages to CLOs, rated note funds, and NAV facilities.
   CFOs have similarities to collateralized loan obligations (“CLOs”), rated note funds, and net asset value (“NAV”) facilities, with a few key differences. For instance, in a CLO, the collateral is a pool of corporate loans with stable cash flows, whereas a CFO can accommodate a collateral pool with less predictable cash flows, such as interests in funds holding equity investments in various portfolio companies. A rated fund is a private fund with a single pool of directly held assets, whereas a CFO is a fund...