Strong demand for private-equity and private-credit investments has led to the increasing popularity of collateralized fund obligations (CFOs) in addition to the better-known collateralized loan obligations (CLOs).
As a trustee to these types of securitizations, we help protect investors’ interests by ensuring adherence to governing documents, managing cash flows, handling defaults, and maintaining the integrity of underlying assets. To fulfill these functions, me and my team work closely with asset managers and arrangers. Because CFOs are highly customized—even more complex than CLOs—these and other market participants recognize the need for experienced trustees.
In my opinion, this work cannot be effectively templated or offshored. The following are practical perspectives drawn from our work on CFOs, starting with a comparison to CLOs.
How CFOs differ from CLOs
The CLO market has successfully proven that a complex asset class—leveraged loans—could be standardized into investable securities. CLOs pool hundreds of corporate loans and slice them into risk-tiered “tranches” based on a standardized priority of payments (called a “waterfall”).
As with other securitized products, each tranche has distinctive risk characteristics. Senior tranches—those first in line for repayment—often appeal to institutional investors seeking predictable payments. Their interest helps investment managers align the liquidity of their investments (or, in this case, relative illiquidity) with investors with long time horizons. This capital-matching dynamic can benefit all parties.
In addition to finding leveraged loans appealing, institutional investors are also attracted to the fast-growing private credit and private equity markets. However, for technical reasons, some either cannot or prefer not to invest as limited partners. The CFO structure solves this problem by giving institutional investors access to private equity and credit through a securitized structure. Investment managers benefit in a similar fashion to CLOs: appeal to investors with substantial assets to deploy and long investment time horizons.
So, at a high level, CFOs apply a similar concept like CLOs but to a fundamentally different asset base. Instead of corporate loans, CFOs bundle limited partner (LP) interests from various private funds—including private equity, private credit, secondaries, and infrastructure.
While CLOs have decades of market practice and established best practices, CFOs remain highly bespoke. Every deal is essentially custom-built.
The operational differences are distinct:
| Feature | Collateralized Loan Obligation (CLO) | Collateralized Fund Obligation (CFO) |
|---|---|---|
| Collateral | Corporate loans (generally self-liquidating) | Limited partner interests in funds (private equity, credit, etc.) |
| Cash Flow | Predictable loan payments | Irregular; dependent on fund distributions and capital calls |
| Standardization | High; established “playbook” and best practices | Low; bespoke, custom-built structures |
| Waterfall Complexity | Standardized priority of payments | Interdependent calculations (e.g., loan-to-value tests often depend on earlier waterfall steps) |
| Time to Market | Known timeline and process | Longer timeline; deals can take 12+ months to assemble and rate |
The role of the trustee
Because of these complexities, the role of the trustee in a CFO is not passive administrative work; it is strategically vital.
UMB acts as an independent fiduciary to balance manager interests with noteholder payments and compliance. A strong trustee provides essential oversight, preventing conflicts and ensuring timely, accurate payments—a function that becomes critical during periods of market stress or manager issues.
Furthermore, the inherent complexity of CFOs typically necessitates specialized fund administrators. Unlike standard securitizations, CFOs require expert handling of regulatory compliance across multiple jurisdictions and the management of capital calls and distributions for diverse private market assets. These tasks are often too complex for in-house teams to manage without introducing significant operational risk.
Strong teams over templating
Investment managers pursuing CFOs aren’t just experimenting; they are building operational platforms to serve different investor bases with the same investment strategy. That requires serious commitment and a supportive team that can match it.
This is why we believe this specific type of corporate trust work cannot be commoditized. Successful collaboration requires people who have seen diverse market cycles and understand both the technical details and the business logic of the structure. A manager needs to know their trustee understands the whole picture—not just a single transaction.
Whether your needs are traditional or highly complex, the UMB corporate trust and agency teams can smooth processing and administration. We’re with you every step of the way. Learn more about our nationally ranked services for bond issuers and specialized offerings around asset-backed securities, distressed debt, loan agency and more or contact us to be connected with a corporate trust team member.
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