Preferred Equity’s Growing Role In CFOs

I. Introduction

This is the second in our series of follow-up pieces to CFO Market Update 2026, each taking a closer look at a topic we flagged only briefly in that broader overview. Last month, we focused on LP-led CFOs and the particular considerations that arise when a sponsor does not control the underlying fund GPs (LP-Led CFOs: Their Rise and Key Considerations). This installment turns to a different thread from the same overview: the growing use of preferred equity within the CFO equity tranche.

A collateralized fund obligation, or CFO, finances a portfolio of fund interests by issuing tranches of rated debt alongside an equity tranche that absorbs first losses and captures the residual upside once the rated debt has been serviced. As we noted in our July 2026 OnPoint, raising that equity tranche has historically been one of the more significant execution constraints in a CFO transaction, and that constraint has only grown more acute as CFO issuance volumes have risen