2 billion USD, Blackstone is set to sell its fund stake

Blackstone is once again at the forefront of the industry's "innovation."

According to reports from multiple media outlets such as the UK's Financial Times, Blackstone is planning a special transaction to package and sell the shares of its "Tactical Opportunities Fund," with a transaction size exceeding $2 billion.

This transaction is special in two ways. First, the Tactical Opportunities Fund is an S fund under Blackstone, known as the world's largest S fund. Three years ago, it completed a fundraising of up to $22.2 billion, setting an industry record. S funds are generally considered the "liquidity providers" in the PE market, the ones who take over assets. But now it is also in trouble and has to use unconventional means to exit.

The second point is even more worth discussing. This time, Blackstone is planning a so - called CFO transaction, that is, "Collateralized Fund Obligation." Simply put, Blackstone is going to package the shares of the Tactical Opportunities Fund into bonds and sell them. The Financial Times said that this transaction by Blackstone will set a historical record for similar transactions. Therefore, once this news came out, it sparked a lot of controversy in the US PE industry and among regulators. In essence, this is to "package" low - liquidity, high - risk PE fund shares into low - risk bonds, which seems a bit like a desperate attempt under the pressure of DPI.

Who will take over? Blackstone is not sure

It should be noted that CFO is not something new in the United States.

In August 2025, AlpInvest under The Carlyle Group successfully issued $1.25 billion of CFOs, breaking the then - industry record. In the same month, Coller Capital completed a huge $2.4 billion CFO transaction, which included some private credit assets in addition to private equity funds.

The above are not all the cases. In fact, a wave of "bondification of PE funds" has quietly emerged in the United States for some time. Evercore, an investment bank that has participated in the design of many CFO transactions recently, said that the market size of CFO transactions this year may exceed $30 billion, a 50% increase compared to 2025. CFO is leaping from a marginal liquidity tool in the past to a mainstream strategy.

And Blackstone, as the global leader in the PE industry, finally "dives into the game," which is undoubtedly a sign that this wave is reaching a new height. This $2 - billion "fund - to - bond" transaction by Blackstone may set a new benchmark for the entire industry in terms of both scale and operational difficulty.

The key to this transaction is to find someone willing to take over the "First - loss Equity." As the name suggests, "First - loss Equity" refers to the investors who will be the first to suffer losses if the rate of return fails to meet expectations. A CFO transaction is essentially a structured transaction arrangement, consisting of low - risk senior bonds, mezzanine bonds, and the highest - risk equity part.

In The Carlyle Group's transaction, the loan - to - value ratio (LTV) of Class A bonds was set at an extremely conservative 50%; below that, the LTVs of Class B and Class C bonds were gradually relaxed to 65% and 75% respectively. Any exit or dividend income generated by the underlying assets (that is, the fund shares) must be strictly distributed in this order. After paying the principal and interest of Class A, B, and C bonds in sequence, the remaining amount will go to the junior equity investors.

Due to this arrangement, senior bonds can obtain a high credit rating, usually reaching the investment - grade rating of AAA, and can be sold to investors with strict risk control, such as insurance companies. However, the equity part, which serves as the risk backstop, is not so easy to sell. In the aforementioned Coller Capital transaction, the "First - loss Equity" was jointly taken over by Coller Capital itself and another well - known PE institution, Ares Management, while the senior bonds were sold to Barings Bank.

In fact, Blackstone is not sure whether it can sell the "First - loss Equity" at present. The Financial Times said that Blackstone is still in the early stages of marketing, price inquiry, and structure design. If the subscription demand for the "First - loss Equity" is weak, Blackstone may also abandon the transaction and return to the traditional S transactions.

"Achieving a DPI of 1 in four or five years" has become a myth

The sudden popularity of CFO is, of course, related to the current exit dilemma faced by the PE industry.

On the surface, the US capital market is booming. Led by the AI concept, the Nasdaq Composite Index has risen by 10% this year, and there have been one large - scale IPO after another. SpaceX has brought the US stock IPO into the crazy "trillion - dollar era," and Anthropic and OpenAI are also about to go public soon. Logically, this should be an era when VC/PE institutions can reap rich investment returns, and it is indeed the case for some institutions. But this is only one side of the coin.

Outside the spotlight of a few star IPOs, the "difficulty of exit" in the PE industry has never really gone away.

According to an analysis of more than 3,000 funds by Goldman Sachs Asset Management, the DPI (Distributed to Paid - in Capital) of private equity funds in 2025 has dropped to 9%, the lowest level since 2010. Moreover, since 2021, this figure has never exceeded 13%. In the previous decade, the industry's average DPI was stable between 20% and 25%. In other words, for every $100 invested by LPs, they can only get back $9 in cash a year - while their original expectation was $20 to $25. It can be seen that for PE funds, "achieving a DPI of 1 in four to five years" was indeed once an industry standard, but now this cycle has been extended to more than 11 years.

The continuous collapse of DPI stems from the backlog of up to $4 trillion in assets waiting to be exited. This "asset dam" mainly originated from the crazy investment period between 2020 and 2022 - at that time, in a zero - interest - rate environment, private equity institutions snapped up assets at extremely high valuation multiples, and now these assets are stuck in the exit channels and in a dilemma. The US stock IPO did pick up in 2026, but only for a few enterprises in a few themes.

In order to find a way out for these assets, the PE industry has exhausted all its means in recent years.

First, there was a sudden upsurge in S funds. As mentioned at the beginning, Blackstone's "Tactical Opportunities Fund" raised $22.2 billion in 2023, doubling the size compared to the previous period and setting a new global record for the scale of S funds. But this record didn't last long. In January 2024, Lexington Partners raised a new - generation S fund of $22.7 billion. Then, in January 2025, the new - generation flagship fund of the veteran S - fund manager Ardian closed, with a staggering scale of $30 billion.

Previously, S funds were just a marginal fund type globally. But in just a few years, it has risen to become the protagonist in the PE market, with a scale exceeding that of the largest PE funds. The problem is that this hasn't really solved the problem; it has just postponed it. Before long, the exit of S funds themselves has also become a problem.

Therefore, in recent years, the so - called "S funds of S funds," that is, the so - called "tertiary funds," which specifically invest in the shares of S funds, have also begun to emerge in the United States. It is estimated that the transaction scale of US tertiary funds in 2025 has exceeded $20 billion.

The latest wave of "bondification of funds" is just a continuation of this trend - private equity assets can no longer continue the "hot - potato game" in the private equity market and have to be packaged and sold to the bond market.

Not surprisingly, such practices have attracted huge doubts. Some media wrote: "The real valuation signals are infinitely delayed and distorted. Asset managers, without admitting the severe valuation write - downs and without shaking the entire balance sheet, pre - empt future cash flows by issuing senior bonds to beautify the DPI data."

Some people worry that if the scale of "bondification of funds" keeps growing and reaches the level of hundreds of billions or even trillions of dollars, once the valuation of the underlying assets declines, the equity capital that serves as a safety cushion in the CFO structure will quickly evaporate. Then the panic will spread upwards, the ratings of senior bonds will be downgraded on a large scale, and the giant insurance institutions holding these bonds will face a capital explosion. The risk will spread from the private equity market to a broader financial system...

Of course, this is just the most alarmist prediction.

This article is from the WeChat public account "China Venture Capital", author: Tao Huidong. It is published by 36Kr with authorization.