A new approach to private markets
Private markets have earned their place in institutional portfolios, but they can still be difficult for investors to manage effectively. Could structured products mitigate some of these challenges? A new whitepaper examines their benefits and complexities.
Private market assets have become a pillar of institutional portfolios, yet their defining features continue to pose challenges. Illiquidity, opaque valuation processes, long capital lock-ups, uneven cash flows, and the dispersion of returns across managers complicate portfolio construction. While private equity and related strategies have historically delivered attractive returns relative to public markets, the path to those returns is often capital-intensive and operationally complex. The emergence of private asset-backed structured products is therefore an important evolution in the way investors can access and shape private market risk.
A recently published whitepaper, ‘Beyond the Blind Pool: How private asset-backed structures reshape risk and return‘ by Alex Billias, Zoe Buck, TzuHwan Seet, and Cody Wilson (all Bella Private Markets) and Josh Lerner (Harvard Business School), examines this development through a systematic lens. Traditional diversification tools, such as allocating across managers, strategies, vintages, geographies, and sectors help reduce idiosyncratic risk but cannot fully address some of private markets’ inherent constraints. This is where private asset-backed structured products, particularly collateralised fund obligations (CFOs), enter the discussion as a potentially transformative mechanism.
CFOs repackage pools of private assets into securities with differentiated risk and return profiles that are funded by the underlying private assets’ cash flows. Senior tranches offer bond-like characteristics, such as downside protection, while junior tranches retain equity-like upside exposure. In doing so, they introduce a level of capital structure flexibility that does not exist in traditional private fund investments. This structuring can embed diversification mechanically, lower the capital threshold required to gain private markets exposure, and align more closely with the regulatory and liquidity needs of certain investor classes, such as insurers.
A This new wave of structured products won’t replace traditional private market fund investing, but can complement existing allocations by tailoring risk and return profiles more closely to institutional goals.
Alex Billias, Bella Private Markets
The analysis also highlights that structured products can mitigate one of the persistent frictions in private investing: the mismatch between long dated assets and investors’ liquidity constraints. By pooling fund interests across both older and more recent vintage years, these products accelerate and stabilise cash flows, shortening the effective duration of private investments and facilitating portfolio rebalancing. For institutions facing regulatory capital requirements or balance sheet sensitivity to illiquid holdings, this feature is particularly valuable.
However, the paper emphasises that these advantages are not guaranteed. CFOs introduce their own complexities and risks. They rely heavily on modelling assumptions, the quality of underlying assets, and the operational capabilities of the products’ sponsors. Governance structures, cash-flow waterfalls, leverage levels, and servicing arrangements all play decisive roles in determining performance.
The authors note that private asset-linked structured products offer an additional route to exposure with different risk-return characteristics and liquidity profiles as opposed to substituting for more conventional private markets investing. “This new wave of structured products won’t replace traditional private market fund investing, but can complement existing allocations by tailoring risk and return profiles more closely to institutional goals,” says Billias. “But investors should be careful to assess manager experience, how they design the products and collateral pools, how leverage is used, and what governance frameworks are in place to make sure that they fully understand the mechanics of these products.”
Overall, the trajectory of private asset-backed structured products will be shaped by the regulatory environment, and their ultimate impact will depend on how regulation evolves alongside the industry.
