Securitization is becoming a common feature of secondaries fundraising

Securitization is becoming a popular method for raising funds in the secondary market. Franklin Templeton recently raised a $1.5 billion Collateralized Fund Obligation (CFO), using it to issue debt backed by cash flows from a pool of private assets it manages. This CFO, known as Structured Solutions 2026, offers investors, including investment advisers, family offices, and insurance companies, exposure to private equity fund stakes and related funds managed by Franklin Templeton's affiliate, Lexington Partners.

The portfolio includes US middle-market loans managed by Benefit Street Partners, a direct-lending subsidiary of Franklin Templeton. While CFO technology has existed for decades, it has gained significant traction in the secondary market over the past 18 months. Other large secondary managers, such as Ares Management Corporation, Carlyle AlpInvest, Ardian, and Blackstone, have reportedly considered raising CFOs in 2026.

The CFO structure allows risk-averse investors, like insurance companies, to access highly diversified, long-dated pools of private assets, providing them with some downside protection. The debt tranches in a CFO are graded and allocated based on investors' risk-return tolerance, with the equity holder absorbing the first loss. This development has raised concerns within the insurance industry, particularly regarding the oversight of complex investments and private credit exposures.