Private Funds Are Turning to Complex Bonds to Tackle Cash Crunch

Private capital firms grappling with a moribund dealmaking climate are increasingly turning to a niche securitized product to raise cash.

Collateralized fund obligations, or CFOs, slice and dice private portfolios into bonds, many with top ratings, allowing their issuers to borrow cheaply against illiquid assets. A swathe of CFOs have come to the market recently, including deals this week from Ares Management Corp. and Carlyle Group Inc.’s private equity platform AlpInvest.

CFOs have taken off at least partly because private firms are getting creative about finding new sources of liquidity. An ongoing slump in dealmaking, exacerbated by this year’s ...