Fitch Ratings has issued the first private equity collaterised fund obligations (CFOs) rating criteria. Michael Romer, senior director at Fitch Ratings, said: “Fitch’s private equity CFO criteria… looks into the risks, as well as the benefits, of a private equity securitisation, and adapts a conservative approach to assigning ratings to notes issued for such complex structures.”
“Some of the risk factors include the limited availability of information, the uncertain nature of underlying cash flows, the limited secondary market of private equity limited partnerships, and the quality of private equity fund management,” said Michelle Galvez, associate director Fitch Ratings.
The report, titled “Going public with private equity CFOs” for the most part explains the structure of private equity funds, their underlying assets and how the fund is operated in terms of draw downs and cash flows. All of the risks, legal, regulatory and financial that Fitch assesses will be familiar territory to institutional investors in private equity. A simplified transaction structure is outlined below. The report also includes draw down and distribution averages on fully liquidated funds – see below.