Private equity has a cash problem. Buyout funds are sitting on portfolio companies they can't easily sell, in a market where exits have slowed to a crawl, and investors who put money in years ago are still waiting to get it back.

So dealmakers have started looking somewhere unexpected for relief: the balance sheets of insurance companies.

The mechanism is a form of structured debt that splits a pool of assets into slices, or "tranches," each with a different level of risk and a different price. The diagram below shows the basic shape of it.

It's the same idea that underpinned mortgage-backed securities before the financial crisis (remember them? They’re widely credited with tanking the global economy), though the assets involved here are stakes in ageing buyout funds rather than home loans.

The top slice gets paid first and carries the lowest risk; the bottom slice absorbs losses first but pays a higher return. That structure lets an insurer buy only the safest portion, while a hedge fund or private credit firm takes the riskier end for a bigger payout.

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Two structures are driving the trend. The first, collateralised fund obligations (CFOs), package up stakes in buyout funds and issue bonds against them, a technique that has existed for two decades but has recently found a much bigger audience.

Between 2018 and 2024, ratings agency KBRA rated 152 tranches across 67 of these deals, worth a combined $37.7 billion, according to its published research. Issuance has kept accelerating since: KBRA-rated CFO volume hit a record $16 billion by September 2025 alone, on course to outpace the prior seven years combined within a single year, the chart below shows the scale of that jump.

The second structure is newer. So-called net asset value (NAV) loans let a fund borrow against the value of its own holdings rather than sell them outright, which is useful for returning cash to investors or funding fresh purchases without a full exit. Fund managers have now started tranching these loans too, carving them into senior portions rated highly enough to appeal to insurers and junior portions aimed at private credit firms with a bigger appetite for risk.

According to Thomas Speller, co-head of funds ratings at Kroll Bond Rating Agency, structuring like this has picked up noticeably over the past year as issuers try to reach "investors with different risk tolerances," a shift he described to the Financial Times.

The scale of the money involved isn't small. Two of the biggest names in the secondaries business (where funds buy up existing stakes in other private equity vehicles) have recently gone to market with CFOs of their own. Blackstone was reported in June 2026 to be exploring the sale of more than $2 billion in fund stakes through its Strategic Partners unit, with the securities aimed partly at insurance buyers, according to Financial Times reporting picked up at the time by Reuters.

In August, Franklin Templeton closed its first CFO, a $1.5 billion deal combining secondaries exposure from its Lexington Partners arm with US middle-market loans from Benefit Street Partners, with the firm's own statement naming insurance companies among the target investors, alongside pension funds and family offices.

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For UK insurers, the appeal is straightforward on paper. Since Brexit, the Solvency UK regime has given firms more flexibility to hold long-duration, illiquid assets in the portfolios backing annuity liabilities, provided they qualify for the matching adjustment, a capital benefit the Prudential Regulation Authority overhauled as recently as 2024 under its reform of the matching adjustment rules.

A senior CFO tranche, rated investment-grade and first in line for cash flows from the underlying funds, looks on the surface like a reasonable fit for that kind of book, not unlike the direct lending and structured credit allocations UK insurers have already been building up elsewhere.

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But UK regulators have been getting noticeably firmer about collateralised structures feeding into insurers' balance sheets in general as CFOs and tranched NAV loans scale up. In April 2026, the PRA proposed toughening the capital treatment of funded reinsurance, a different but conceptually related type of collateralised arrangement widely used in the bulk annuity market after finding that firms were holding as little as 2–4% capital against exposures the regulator judged should carry closer to 10–15%, particularly where the collateral backing the deal was riskier than it first appeared.

Announcing the proposals, Sam Woods, deputy governor for prudential regulation and the PRA's chief executive, said: "Funded reinsurance is growing rapidly and has the potential to undermine the resilience of insurers if not managed properly." The same underlying concern that a high headline rating on a collateralised structure can understate what's really sitting behind it  is exactly what critics of rated feeders and secondaries CFOs have raised too, and it means insurers buying senior tranches will want to look hard at what's backing them rather than relying on the rating alone.

Layering debt on top of buyout funds that are often already leveraged at the portfolio-company level compounds that concern, since losses can stack up in ways that are harder to see from the outside.

A handful of secondaries managers reportedly began tranching their own NAV loans to reach insurers only this year, according to a private credit executive who spoke to the FT, meaning underwriters and capital teams are being asked to get comfortable with a fairly untested corner of structured finance rather quickly.

There's also a banking angle that is of interest. Some lenders have reportedly been selling off the riskiest slices of the NAV loans they extend to private credit funds as a way of freeing up their own capital, with buyers including private credit shops themselves.

That's a pattern insurers evaluating these deals may want to understand before assuming a senior tranche is as insulated as its rating implies.

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None of this is likely to slow the trend. Private equity firms need liquidity, and insurers are sitting on trillions in long-term capital that has to go somewhere. What's changed is the sophistication of the products being built to connect the two, and the speed with which they're moving from niche financing tool to mainstream fixture of the secondaries market.