Insurers built the CFO market, and advisers will meet it next

Insurers built the collateralised fund obligation to solve their own balance sheet problem. The structure is working its way toward the wealth channel, and the first Australian advisers to meet one will have to judge it without much precedent to draw on.

Franklin Templeton closed its first CFO in August 2026, raising US$1.5 billion from global investors. Evercore placed it with institutions, so no adviser will be buying this particular deal. The template it sets is another matter, and ISN has covered the transaction and its structure in detail.

Franklin Templeton Structured Solutions 2026, L.P. holds private equity secondaries and continuation vehicles managed by Lexington Partners, alongside US middle-market direct lending managed by Benefit Street Partners. The portfolio spans several investment vintages and a broad range of underlying companies. Franklin Templeton Investment Solutions acts as collateral manager.

George Stephan, global chief operating officer, wealth management private markets at Franklin Templeton, points to where the demand is coming from.

“We are seeing growing demand from clients for access to differentiated private markets strategies in structures that are efficient and scalable.”

The CLO template

A CFO borrows the plumbing of a collateralised loan obligation and points it at a different asset. Instead of pooling corporate loans, the sponsor pools limited partnership interests in private funds, then issues notes secured against that pool.

Senior noteholders take first call on the cash the underlying funds distribute and carry the highest rating. Junior noteholders rank behind them and earn more for the privilege. The equity tranche absorbs the first loss, and sponsors often keep it themselves. Law firm Dechert puts the typical Class A tranche at 60 to 75 per cent of the capital stack, rated between A- and A, with junior tranches running from BBB- down to BB.

The result is an instrument whose income looks like credit and whose rating looks like fixed interest, while the assets underneath remain private equity and unlisted loans. That combination is what makes it worth understanding before one lands on a product shelf.

Why the market is growing

Regulation explains most of the growth, beginning with the National Association of Insurance Commissioners rewriting its bond definition in January 2025, which gave US insurers clarity on treatment and lower risk-based capital charges on the senior notes. Solvency UK reforms extended matching adjustment eligibility to assets with predictable cash flows, pulling UK annuity writers in behind them.

Issuance has tracked those rule changes almost step for step. Annual volumes reached roughly US$4 billion by 2022, stalled through 2023 as rates rose, then recovered to an estimated US$20 billion to US$25 billion in 2025. Dechert expects US$30 billion for 2026 as a whole.

Collateral has become easier to find at the same speed. Evercore counted more than US$120 billion of private asset secondary transactions in the first half of 2026, about 20 per cent above the first half of 2025, with single-asset continuation vehicles alone accounting for US$34 billion.

Who manages the collateral

The experience behind a CFO matters as much as its structure, because the notes depend on managers who can value and realise private assets through a cycle.

Lexington Partners helped pioneer the institutional secondary market more than 36 years ago and carries over US$84 billion of total capitalisation. Benefit Street Partners managed US$94 billion at 30 June 2026 across private debt, real estate debt, structured credit and liquid loans. Franklin Templeton Investment Solutions brings portfolio construction and liquidity management across both public and private markets.

The valuation question

The feature that makes these notes attractive also deserves the closest attention, and it comes down to how managers value the collateral. Every loan-to-value test depends on net asset values the underlying managers strike, usually quarterly and with a lag, so private marks can move more slowly than public comparables in a sharp sell-off.

Valuations can adjust later while distributions from the underlying funds slow, which tightens those tests at a time when the collateral has less cash to give. Exit markets were quiet through 2022 and 2023, and private equity distributions slowed with them.

Diversification across strategies and vintages is what carries a structure through that, and Franklin Templeton has built it into this portfolio across two managers, several vintages and a broad range of underlying companies.

Dechert also notes the market is still maturing. Only a relatively small number of CFOs have been through a full credit cycle, and secondary trading in the notes is thinner than in CLOs. They suit investors who can hold to maturity.

Questions to ask

When a product arrives carrying this profile, three questions do most of the work. How much debt ranks ahead of the tranche on offer? Who strikes the net asset value that governs the tests, and how often? What happens to the holder if distributions slow for an extended period?

ASIC has taken a close interest in how managers value and disclose private markets assets, dating back to November 2025 when it published its private credit surveillance findings. That focus is likely to continue as the structures around private assets develop, and managers with clear valuation governance and experienced collateral management are well placed to meet it.

Insurers built this market to meet their own needs. The next version of it may well arrive with a product disclosure statement attached, and the advisers who already understand how the tranches rank will read it faster than those meeting the structure for the first time.