Insurers have invested in private equity for many years. What is more recent, and particularly interesting in a recent Financial Times article, is that insurers' investment constraints are beginning to influence the way some private equity financing is structured.
The objective is relatively straightforward: to transform part of the risk associated with private equity assets into debt instruments whose characteristics may be more suitable for institutional investors, including insurers.
The mechanics are worth understanding. They also deserve careful scrutiny, because several layers of leverage can ultimately sit underneath a senior tranche carrying a strong credit rating.
From portfolio value to NAV loans
Consider a private equity fund holding stakes in several companies.
Those companies will typically have debt of their own. That does not, of course, mean that the fund's investments have negative value. If a portfolio company has an enterprise value of €150 million and net debt of €60 million, its equity is worth approximately €90 million.
By aggregating the value of its investments and taking account of the fund's other assets and liabilities, we arrive at its NAV — Net Asset Value.
A fund can then borrow against this NAV and the cash flows expected from its portfolio. This is the basic principle of a NAV loan.
Importantly, this borrowing sits at fund level. It therefore represents an additional layer of debt above the leverage already carried by the underlying portfolio companies.
That distinction matters when assessing the risk.
When the debt itself is tranched
The development described by the Financial Times goes one step further.
Some financing structures can be divided into different tranches. A junior tranche absorbs the first losses, providing additional protection to the senior tranche.
The senior tranche can consequently have a significantly lower risk profile and potentially obtain a credit rating compatible with the investment constraints of certain insurers.
The principle is familiar from structured finance. Its application to private markets is nevertheless particularly interesting.
The FT highlights the growth of Collateralised Fund Obligations (CFOs), with issuance by secondaries funds increasing from just over $400 million in 2021 to $6.5 billion in 2025.
CFOs and NAV loans are not the same instrument. However, they illustrate a broader development: financial structuring is increasingly being used to reshape the risk and return characteristics of private-market assets.
For insurers, this may provide indirect exposure to those assets through instruments that behave more like conventional fixed income.
What happens to the underlying risk?
Structuring redistributes risk between investors. It does not eliminate it.
Consider again our company with an enterprise value of €150 million and net debt of €60 million. The equity is worth €90 million.
Now assume that its enterprise value falls by 20%, to €120 million. If debt remains at €60 million, the value of the equity falls to €60 million.
A 20% decline in enterprise value has therefore produced a 33% decline in equity value.
That is the effect of leverage.
The decline feeds through into the NAV of the private equity fund. And that NAV is precisely what supports the NAV loan.
Several layers can therefore sit on top of one another:
portfolio-company debt → value of the fund's investments → fund NAV → NAV loan → senior and junior tranches
The junior tranche protects the senior tranche against the first losses. But the ability of the overall structure to service its debt ultimately remains dependent on the valuations and cash flows generated by the companies held in the underlying funds.
For an institutional investor, this distinction is important. The legal seniority of a tranche and its credit rating do not remove the need to understand the economic risk several layers beneath it.
Is there a lesson from the subprime crisis?
Comparisons with the structured products that played a role in the 2008 financial crisis need to be made carefully. The underlying assets, structures, liquidity characteristics and risks are different.
Nevertheless, the subprime experience provides one useful reminder.
Financial engineering can redistribute risk and create tranches with very different levels of seniority. A strong rating on a senior tranche may be entirely justified by the amount of subordination beneath it.
But structuring does not change the nature of the assets and cash flows at the beginning of the chain.
This becomes particularly important when several layers of leverage accumulate.
The relevant analysis should therefore include scenarios in which several adverse developments occur at the same time: falling private-equity valuations, slower distributions from funds, difficulties affecting several portfolio companies, tighter liquidity and more expensive refinancing.
These are precisely the circumstances in which apparently separate layers of risk can become correlated.
Insurers need to look beyond the rating
For an insurer considering this type of investment, I therefore think the analysis needs to go beyond the rating assigned to the senior tranche.
Several factors deserve particular attention:
- the leverage carried by the underlying portfolio companies;
- the actual diversification of the portfolio;
- the methodology used to determine NAV;
- the size of the NAV loan relative to that NAV;
- the effective subordination provided by the junior tranches;
- the covenants and events that could trigger restrictions or repayment;
- the liquidity of the instrument;
- and, importantly, how the entire structure behaves when valuations and distributions fall simultaneously.
The development of these instruments is potentially attractive for insurers because it can broaden the range of private-market exposures available in a debt-like format.
However, the greater the financial transformation between the original economic assets and the security ultimately held by the insurer, the more important it becomes to work back through the entire structure and understand where the risk ultimately sits.
That is probably the most useful point I take away from this article.
Article analysed: Private equity turns to financial engineering to lure insurance billions, Alexandra Heal, Financial Times, 18 September 2026.