INSURITIZATION AND SECURIZATION

Other structures focus on achieving more favorable regulatory treatment, as opposed to placing additional assets under management.

In particular, the capital underpinning rules for private equity investments for U.S. investment banks make such investments costly in terms of the risk capital they require.

Using collateralized debt obligations (CDOs) structures, an existing private equity portfolio— for example, from a U.S. investment bank—can be sold into a special purpose vehicle that refinances itself with investors with a different risk appetite (i.e., pre-defined interest rates on bonds over the life of the asset, instead of uncertain future private equity returns). As the portfolio is sold to the special purpose vehicle, it is off-balance sheet of the seller.

By using option structures, it may even be possible to re-direct some of the excess returns on such portfolios back to the original holder of the assets. Together with the respective capital relief, this leads to an enhanced return on equity.

Additional leverage can be created through use of a highly rated insurance coverage provider. Insurance cover is provided to the special purpose vehicle in the form of a protection, which leads to an enhanced credit quality of the issue, and thereby to lower refinancing costs. This enhances the return on equity of the original seller. The overall result is an extremely efficient product for the seller of the assets.