Key Takeaways
- • Two Sigma co-founders David Siegel and John Overdeck are deploying a collateralized fund obligation (CFO) through their family office vehicle Sightway Capital to lever private equity fund investments, reviving a structured finance instrument rarely used in recent years.
- • Sightway Capital raised $216 million through a securitized note sale in August 2018, with repayment structured against cash flows from 32 underlying private equity fund stakes, according to Bloomberg.
- • The CFO structure amplifies both potential returns and downside risk exposure to private equity performance, enabling the Two Sigma founders to increase their leverage on PE allocations while maintaining diversification across multiple fund partnerships.
- • This strategy signals institutional confidence in private equity fund performance and demonstrates how ultra-high-net-worth individuals associated with major hedge funds are deploying alternative leverage structures to enhance returns on alternative asset allocations.
Summary
David Siegel and John Overdeck, the billionaire co-founders and co-chairmen of Two Sigma Investments—a $52 billion hedge fund—are employing a sophisticated leverage strategy to amplify returns on their private equity fund investments through Sightway Capital, their family office investment vehicle. According to Bloomberg, the pair recently structured a collateralized fund obligation (CFO), a securitized financing instrument that remains relatively uncommon in modern capital markets, to enhance their exposure to private equity returns.
The transaction generated $216 million in capital through a securitized note sale completed in August 2018. The notes are structured as asset-backed securities with repayment obligations tied directly to cash flows generated from the underlying portfolio of 32 private equity fund stakes held within Sightway Capital. This approach effectively leverages the diversified PE fund exposure across multiple partnerships while using the collective cash generation as the source of repayment to investors in the securitized notes.
The CFO structure represents a deliberate choice to increase both potential upside and downside volatility on PE allocations. By layering debt financing against fund-level cash flows rather than operating company leverage, the founders maintain diversification benefits across 32 separate PE fund partnerships while amplifying the risk-return profile of their overall private equity portfolio. This strategy has been largely dormant since the 2008 financial crisis, making the Two Sigma founders' deployment of CFOs a notable signal of confidence in private equity valuations and fund-level performance trajectories at a time when PE distributions and dry powder levels remain robust across the industry.
The use of this structure underscores how institutional-scale allocators to private equity are exploring additional leverage mechanisms beyond traditional fund commitments and co-investment vehicles to maximize returns on alternative asset allocations.
The transaction generated $216 million in capital through a securitized note sale completed in August 2018. The notes are structured as asset-backed securities with repayment obligations tied directly to cash flows generated from the underlying portfolio of 32 private equity fund stakes held within Sightway Capital. This approach effectively leverages the diversified PE fund exposure across multiple partnerships while using the collective cash generation as the source of repayment to investors in the securitized notes.
The CFO structure represents a deliberate choice to increase both potential upside and downside volatility on PE allocations. By layering debt financing against fund-level cash flows rather than operating company leverage, the founders maintain diversification benefits across 32 separate PE fund partnerships while amplifying the risk-return profile of their overall private equity portfolio. This strategy has been largely dormant since the 2008 financial crisis, making the Two Sigma founders' deployment of CFOs a notable signal of confidence in private equity valuations and fund-level performance trajectories at a time when PE distributions and dry powder levels remain robust across the industry.
The use of this structure underscores how institutional-scale allocators to private equity are exploring additional leverage mechanisms beyond traditional fund commitments and co-investment vehicles to maximize returns on alternative asset allocations.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.