Driving market adoption: Structural similarities between rated feeder funds and structured finance products

As institutional demand for exposure to private markets continues to accelerate, rated feeder funds have emerged as a compelling solution to bridge the gap between alternative asset strategies and credit-sensitive investor mandates. These vehicles provide access to private equity, credit, real estate, and infrastructure investments through a fund structure that incorporates features historically associated with more traditional structured finance products, such as collateralized loan obligations (CLOs) and other asset-backed securities (ABS).

Notably, a growing number of credit rating agencies are assigning investment-grade ratings to tranches within these structures, while institutional investors – including insurance companies, pensions, and sovereign wealth funds – are increasingly participating in those transactions. This trend is driven by the clear and deliberate structural alignment between rated feeder funds and traditional structured finance vehicles, bringing added transparency, risk differentiation, and credit integrity.

Below, we outline five key structural similarities that are currently contributing to the rapid market acceptance of rated feeder funds.

1. Tranching of risk and return

Rated feeder funds have traditionally been structured with multiple tranches of capital, akin to the layering commonly seen in CLOs and other ABS. Senior tranches are designed to meet investment-grade criteria established by credit rating agencies and benefit from priority in distributions. Subordinated tranches, by contrast, are structured to absorb initial losses and receive residual returns. This multi-tiered structure facilitates risk segmentation, allowing for participation by a broad range of investors with varying risk tolerances and regulatory considerations. The current trend is toward more tranches with a greater dispersion across a wider array of rating categories.

Recent transactions reflect a shift toward permitting horizontal tranche purchases within rated feeder funds. Under this approach, investors may purchase specific tranches (such as the rated or senior class) without the requirement to acquire a vertical, pro rata interest in all tranches. This development aligns rated feeder structures more closely with established market practices in CLOs and other ABS, where horizontal tranche selection is commonplace. The introduction of this flexibility is expected to better align with investor objectives and thereby broaden the investor base and enhance the overall marketability of these vehicles.

2. Credit enhancement mechanisms

Like their structured finance counterparts, rated feeder funds rely on credit enhancement features to protect senior investors and secure higher credit ratings. These mechanisms may include overcollateralization (where asset value exceeds the funded amount), subordination of junior capital, and the use of liquidity reserves or capital support agreements from sponsors. The goal is to build structural resilience into the vehicle and insulate senior tranches from asset underperformance or cash flow disruptions.

3. Cash flow waterfall structures

The use of predefined waterfall payment models is another area of alignment with structured finance. In rated feeder funds, cash flows from the underlying private market assets – whether they be dividends, interest, or return of capital – are distributed in a strict order of priority, with senior tranches paid before subordinate tranches. This structure supports the ability of rating agencies to model and monitor expected cash flows and loss coverage, in addition to providing investors with a high degree of predictability and control over their exposure.

4. Alignment with rating agency methodologies

Rated feeder funds are increasingly being designed with direct input from credit rating agencies and in accordance with established structured finance rating methodologies. Sponsors often work with rating agencies to model stress scenarios, coverage ratios, and loss-absorbing capacity using frameworks similar to those applied in CLOs or other structured notes. This approach gives rating agencies confidence in assigning investment-grade ratings, and allows institutional investors, particularly those with ratings-based investment mandates, to participate with enhanced visibility into risk.

5. Flexibility for innovative and customized financing structures

A key advantage that rated feeder funds share with structured finance vehicles is their adaptability for novel financing arrangements. As much as CLOs have evolved to include environmental, social, and governance (ESG)-linked features, revolving portfolios, and hybrid asset pools, rated feeder funds can be tailored to meet specific capital needs of sponsors and investor bases. This includes customized leverage profiles, delayed draw features, capital call facilities, or hybrid instruments that blend debt-like and equity-like characteristics. The modular structure of rated feeders enables bespoke solutions without sacrificing the integrity required for ratings. As new financing use cases emerge – such as continuation vehicles, net asset value (NAV) loans, or cross-fund lending – rated feeder funds offer a highly customizable platform to scale capital efficiently while retaining investor protections.

Conclusion

The convergence of these five structural features – tranching, credit enhancement, waterfall mechanics, alignment with rating methodologies, and structural flexibility – positions rated feeder funds as a hybrid structure that combines the institutional appeal of structured finance with the return potential of private market investments, particularly with respect to credit assets. As a result, the market is witnessing rapid adoption by both investors and credit rating agencies, who view these vehicles as offering a transparent, credit-conscious path into alternative assets.

We expect continued innovation and issuance in this space as sponsors, asset managers, and investors increasingly look to rated feeder fund structures to meet the twin goals of private market exposure and credit-sensitive portfolio construction.

For more information, please contact the authors.