Fund and Asset Manager Rating Group...Fund and Asset Manager Rating Group August 9, 2019 This...

Fund and Asset Manager Rating Group

www.fitchratings.com August 9, 2019

This presale report reflects information at the time that Fitch’s Expected Ratings are issued and as of the date of this report. Investors should be aware that the transaction has yet to be finalized and changes could occur. Investors should refer to Fitch’s related Rating Action Commentary issued at transaction closing for final ratings. Final ratings will include

an assessment of any material information that may have changed subsequent to the publication of the presale.

PE CFOs / U.S.

Nassau 2019 CFO LLC Presale Report

Transaction Overview

Fitch Ratings expects to rate the class A and B notes issued by Nassau 2019 CFO LLC

(Nassau CFO, or the issuer), as well as the liquidity loan facility available, as displayed in the

table above. Nassau CFO is a collateralized fund obligation (CFO) transaction managed by

Nassau Alternative Investments LLC (NAI) and backed by interests in a diversified pool of

private equity (PE) funds (buyout, mezzanine, debt and venture), with approximately $375.7

million in net asset value (NAV) of funded commitments and $79.3 million of unfunded capital

commitments as of June 30, 2019. Nassau Financial Group is the sponsor of the transaction.

The underlying funds will distribute cash as they generate income or exit investments, and will

make capital calls when they require additional cash to invest. Cash flows generated by the funds

will be used to pay off the notes, as well as pay interest and expenses.

Key Rating Drivers

NAV Overcollateralization: The rated notes will make up approximately 70% of the NAV at

issuance, providing a sufficient level of credit enhancement (CE) at the indicated rating levels, per

Fitch’s rating criteria. The 50% of CE for class A and 30% of CE for class B provide the notes with a

cushion in case PE distributions are realized at lower levels than expected. The rating of the class B

notes reflects its subordination and the lower level of CE available to this class.

Structural Features: Key structural features include a liquidity loan facility to fund capital calls,

interest payments and other expenses in the event of a cash shortfall; amortization triggers tied

to loan to value (LTV) levels; and long final maturities of the notes to support the structure’s

ability to weather a down market.

Diversified Portfolio: Nassau CFO’s portfolio of PE interests is diversified by strategy,

vintage, managers, funds, underlying holdings and sectors. The portfolio comprises 109 funds

managed by 69 fund managers, with 1,273 underlying investments. The high portfolio

diversification is counterbalanced by a focus on funds run by smaller and mid-sized managers,

and a higher allocation to third- and fourth-quartile funds relative to other PE CFO portfolios.

Cash Flow Analysis: Fitch measured the ability of the structure to withstand weak performance

in its underlying funds in combination with adverse market cycles. Class A notes are expected to

be rated ‘Asf’, and class B notes are expected to be rated ‘BBsf’, reflecting their ability to

withstand fourth-quartile- and third-quartile-level performance, respectively, in the underlying

funds under Fitch’s scenario analysis.

Inside This Report Page Transaction Overview 1 Key Rating Drivers 1 Structure Overview 2 Portfolio Overview 3 Structural Features 6 Cash Flow Scenario Analysis 11 Valuations 16 The Manager 17 Alignment of Interests 18 Security and

Bankruptcy Remoteness 18 The Model 18 Surveillance of the Transaction 19 Rating Sensitivities 19 Appendix: Terms of the Notes 20

Related Criteria

Closed-End Funds and Market Value Structures Rating Criteria (June 2019)

Structured Finance and Covered Bonds Counterparty Rating Criteria (April 2019)

Global Structured Finance Rating Criteria (May 2019)

Analysts

Funds and Asset Managers Greg Fayvilevich +1 212 908-9151 [email protected]

Igor Gorovits, CFA +1 646 582-4662 [email protected]

Domenic Bussanich +1 646 582-4874 [email protected]

Alexandra Kelly +1 646 582-4814 [email protected]

Brian Jarmakowicz +1 646 582-4586 [email protected]

Ari Luss +1 646 582-3565 [email protected]

Structured Finance Helen Anagnostos +1 212 908-0876 [email protected]

Capital Structure

Class Expected Rating

Amount ($ Mil.)

Interest Rate (%)

Maturity Approximate

% of NAV Approximate NAV OC (%)

Liquidity Loan Facility A+(EXP)sf N.A.a 3mL + 2.25 August 2034 N.A. N.A.

a

A A(EXP)sf 187.8 TBD August 2034 50 50

B BB(EXP)sf 75.2 TBD August 2034 20 30

Equity N.A. 112.7 Residual N.A. N.A. N.A.

aLiquidity loan facility is not drawn at launch but has an initial commitment of $30 million that steps down over time.

N.A. – Not applicable at launch. 3mL – Three-month LIBOR. TBD – to be determined. Expected ratings do not reflect final ratings and are based on information provided by the issuer as of Aug. 8, 2019. These expected ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy, sell or hold any security. The offering circular and other materials should be reviewed prior to any purchase.

https://www.fitchratings.com/site/re/10080498






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Nassau 2019 CFO LLC 2

August 9, 2019

Counterparty Exposure: Certain structural features of the transaction involve reliance on

counterparties, such as the liquidity lender and account banks. The ratings of the notes could

be negatively affected in the event that key counterparties fail to perform their duties. Fitch

believes this risk is mitigated by counterparty rating requirements and replacement provisions

in the transaction documents that align with Fitch’s criteria.

Capabilities of the Manager: Fitch believes the manager (NAI) has the capabilities and

resources required to manage this transaction. NAI’s management team has extensive

experience in the PE industry, although the team is comparably smaller than for other Fitch-

rated PE CFOs.

Alignment of Interests: The sponsor and noteholders’ interests are sufficiently aligned, as the

sponsor and its affiliates are expected to hold at least a majority of the equity stake

(approximately 15%30% of NAV) in Nassau CFO, and absorb any losses before noteholders.

However, the degree of alignment of interest is lower than for other PE CFOs where sponsors

retained a greater portion of the transaction through the equity and/or debt tranches.

Asset Isolation and Legal Structure: Fitch expects that the issuer will be structured as a

special-purpose, bankruptcy-remote entity, the issuer will have 100% member interests in

Nassau 2019 CFO Fund LLC (AssetCo) and the assets held by AssetCo will have been

transferred to it as a true sale. Fitch has not yet received legal opinions on the transaction, but

expects the opinions to address true sale, non-consolidation and other items customary for

similar transactions.

Rating Cap at ‘Asf’ Category: Fitch has a rating cap at the ‘Asf’ category for PE CFO

transactions, primarily driven by the uncertain nature of PE fund cash flows. An additional

rating cap at the ‘Asf’ category applies to class B notes as their interest payment is deferrable.

Structure Overview

Nassau CFO is expected to be structured as a special-purpose entity that will be the sole

equityholder of AssetCo. The issuer’s capitalization will include class A and B notes, as well as

an equity tranche. The net cash received by the issuer via the issuance of the notes will be

used by the issuer to purchase 100% shareholding interest in AssetCo from the sponsor and

pay certain fees and expenses incurred in connection with the issuance and acquisition of the

fund investments.

AssetCo will hold the fund investments as the limited partner (LP) for each of the underlying

interests, except as described below with respect to investments held in “side vehicles”.

AssetCo will transfer cash distributions received from the fund investments to the issuer, which

will apply the distributions quarterly in accordance with the priority of payments.

Related Research

PE CFOs Gain Traction (February 2019)




August 9, 2019

Portfolio Overview

The portfolio is diversified across strategies, vintages, managers, funds, and underlying

holdings and sectors. The funds were acquired over time, largely through primary fund

commitments, by Nassau Life Insurance Company (NNY) and its affiliates for their general

investment account to support the insurance business.

The portfolio is expected to be largely static. Reinvestments in new funds are not permitted

after the transaction closes. Selling fund interests is allowed, as described below, but is not

expected under normal circumstances.

The funds are mature, with a weighted average (WA) vintage of 2013 and $79.3 million of remaining

unfunded capital commitments, which is approximately 11% of total commitments, or 21% of NAV.

Due to the maturity of the portfolio, it is now cash flow positive, with 2018 distributions at $112 million

and capital calls at $46 million. Nassau CFO has a higher balance of debt funds than previous PE

CFOs rated by Fitch recently, which may provide more steady cash flows relative to buyout funds.

This may therefore reduce the need to draw on contingent liquidity available to the PE CFO in a

downturn scenario. The net IRR for the portfolio as a whole from inception through 2018 is

approximately 10%, according to Fitch’s calculations based on actual fund cash flow data provided

by the sponsor (this measure is an estimate using annual cash flows).

The portfolio consists primarily of U.S. funds run by smaller and mid-sized managers, with

average fund sizes for the buyout, mezzanine/debt and venture strategies at $688 million, $375

million and $300 million, respectively. Fitch reviewed each fund and manager in the portfolio

quantitatively and qualitatively, including reviewing the manager’s history, size, capital-raising

success, and previous fund performance based on information available publicly, from third-

party data providers and from the sponsor. Based on this review, Fitch applied additional

stresses to certain funds beyond the base case scenario analysis, as described further below.

Top 10 General Partners

(As of June 30, 2019) (% of Total Exposure)

Intermediate Capital Group 4.6

Stage 1 Ventures 3.9

GoldPoint Partners 3.8

Northstar Capital 3.8

Gridiron Capital 3.4

Fund Manager A 3.3

AEA Investors 3.1

Edison Partners 2.9

Fund Manager B 2.7

PineBridge Investments 2.7

Source: Nassau 2019 CFO LLC.

Nassau 2019 CFO LLC: Post-Closing Structure

aAlso, potentially non-affiliated investors.

Source: Nassau 2019 CFO.

Affiliates of Nassau

Financial Groupa

Fund Interests

Nassau 2019 CFO LLC

(Issuer)

Nassau 2019 CFO Fund LLC

(AssetCo)

Nassau Alternative

Investments LLC

(Investment Manager)

Barclays Bank plc

(Liquidity Lender)

Barclays Capital Inc. and

Sandler O'Neill &

Partners, L.P.

(Initial Purchasers) Collateralized

Fund Obligation

Investment Management

Agreement

$$$

U.S. Bank, National

Association

(Trustee)



August 9, 2019

The portfolio is fairly balanced in terms of quartiles, skewing slightly toward the bottom two at 54%,

as shown in the chart above. Of the 17% of NAV in the fourth quartile, 11% is associated with a net

IRR higher than 6% and only 4% represents a negative net IRR. Of the fourth-quartile NAV, 4% is

associated with 2015 or 2016 vintages, where quartile rankings may still evolve given the young age

of these funds, whose net multiples range from 1.02x1.08x.

Approximately 59% of funds by NAV have net IRRs greater than 10%, with a majority of buyout

funds returning more than 15% and mezzanine funds clustered in the 5%10% bucket. On a WA

basis, the buyout funds in the portfolio have net IRRs and net multiples of 17.7% and 1.53x, debt

and mezzanine funds are at 10.4% and 1.28x, and venture funds are at 13.0% and 1.52x,

respectively.

Fitch has identified 6.6% of NAV associated with funds that have either exhibited weak performance,

where the general partner’s (GP) prior funds have exhibited weak performance, and/or where the

GP’s resources appear to be limited or it has not raised additional capital in recent years. As

described further below, Fitch ran additional stresses where it did not afford these funds credit in its

modelling.

The portfolio has 26 funds, approximately 10% of NAV, that are older than 11 years at transaction

launch, and about 2% of NAV is in 2005 and earlier vintages. Funds that are near the end of their

lives may have fewer holdings in their portfolios, and their distributions may be less certain. Across

the cash flow scenarios Fitch ran, these tail-end funds on average contribute 3% of the total

distributions.

Two investments in the portfolio are “side vehicles” where NNY owned the underlying holdings

directly. NNY made commitments to Kayne Anderson and ICG Fund Advisors to invest directly in

loan participations, warrants and equity alongside these managers’ respective mezzanine debt

funds. All underlying holdings in the side vehicles are identical to those in the actual funds and

represent similar exposures to investments in the actual funds. Side vehicles are common in PE

and are generally structured to provide the investor more favorable terms than those available to

investors in the equivalent funds. The investments owned by each side vehicle were transferred

into AssetCo via participation agreements. As the investment strategy and cash flow profiles of

these side vehicles are expected to follow the equivalent funds, Fitch applied its normal cash flow

projections to each vehicle as a debt mezzanine fund.

The Nassau CFO portfolio is the most diversified Fitch has rated, with 1,273 underlying portfolio

company holdings. The top holdings make up 1.1%, 0.7% and 0.7% of NAV. The highest

concentration to an underlying sector is in software and services, at 20% of NAV, as shown on the

table on the left.

Underlying Investment Sector Breakdown

(As of March 31, 2019)

(% of NAV)

Software and Services 20

Commercial and Professional Services 15

Capital Goods 14

Healthcare Equipment and Services 9

Energy 5

Technology Hardware and Equipment 4

Pharmaceuticals, Biotechnology and Life Sciences 4

Materials 4

Consumer Services 4

Automobiles and Components 4

Remaining 12 Sectors 18

Source: Nassau 2019 CFO LLC.

First Quartile

33%

Second Quartile

13%

Third Quartile

37%

Fourth Quartile

17%

aData as of Dec. 31, 2018, depending on availability.Source: Nassau 2019 CFO.

Portfolio NAV by Quartile(As of March 31, 2019a)

0%–5% IRR8%

Portfolio NAV by Net IRR (As of March 31, 2019a)

10%–15% IRR24%

Greater than 15% IRR

35%

Negative IRR4%

5%–10% IRR29%


Less than 0.5x0%

0.5–1.0x2%

1.0x–1.5x64%

1.5x–2.0x24%

Greater than 2.0x10%

Portfolio NAV by Net Multiple

(As of March 31, 2019a)




August 9, 2019

Nassau 2019 CFO Portfolio (As of June 30, 2019)

No. Funds Vintage Geography Strategy Commitment

($ Mil.) NAV

($ Mil.) % of NAV

Undrawn Capital

Commitments ($ Mil.)

Total Exposure

($ Mil.) % of Total Exposure

1 ICG Fund Advisors LLC 2014 U.S. Mezzanine 20.0 20.0 5.3 0.8 20.8 4.6

2 Stage 1 Ventures Seed LLC 2014 U.S. Venture Capital 15.0 15.1 4.0 2.8 17.9 3.9

3 New Canaan Funding Mezzanine VI 2015 U.S. Mezzanine 12.0 5.3 1.4 4.8 10.1 2.2

4 Windjammer Senior Equity Fund IV 2012 U.S. Buyout 7.5 8.7 2.3 1.4 10.1 2.2

5 Fund A 2015 U.S. Mezzanine 10.0 5.8 1.5 3.9 9.7 2.1

6 Gridiron Capital Fund III 2015 U.S. Buyout 6.0 6.7 1.8 2.8 9.5 2.1

7 Maranon Mezzanine II 2015 U.S. Mezzanine 10.0 5.7 1.5 3.5 9.3 2.0

8 Northstar Mezz Partners VI 2013 U.S. Mezzanine 10.0 7.7 2.0 1.6 9.3 2.0

9 GoldPoint Mezz Partners IV 2015 U.S. Mezzanine 8.0 6.8 1.8 2.3 9.1 2.0

10 Fund B 2015 U.S. Venture Capital 5.0 8.3 2.2 0.7 9.0 2.0

11 PineBridge Structured Capital Partners III 2016 U.S. Mezzanine 10.0 5.2 1.4 3.6 8.8 1.9

12 Fund C 2007 U.S. Venture Capital 9.0 8.6 2.3 0.0 8.7 1.9

13 Aurora Equity Partners V 2016 U.S. Buyout 8.0 4.5 1.2 3.8 8.3 1.8

14 Peninsula Fund VI 2016 U.S. Mezzanine 8.0 6.2 1.7 2.1 8.3 1.8

15 New Harbor Capital Fund 2015 U.S. Buyout 5.0 7.8 2.1 0.4 8.3 1.8

16 Northstar Mezz Partners V 2007 U.S. Mezzanine 17.5 6.5 1.7 1.5 8.0 1.8

17 Pinnacle IV 2015 U.S. Mezzanine 8.0 7.9 2.1 0.0 7.9 1.7

18 Freeport First Lien Loan Fund III 2015 U.S. Debt 8.0 6.4 1.7 1.2 7.7 1.7

19 NB Strategic Co-Investment Partners III 2016 U.S. Buyout 6.0 5.4 1.4 1.7 7.1 1.6

20 Edison Venture Fund VIII 2015 U.S. Buyout 5.0 6.6 1.8 0.1 6.7 1.5

21 Yukon Partners II 2013 U.S. Mezzanine 8.0 4.9 1.3 1.4 6.2 1.4

22 GCG Investors III 2013 U.S. Mezzanine 11.0 4.7 1.2 1.1 5.8 1.3

23 Trinity Hunt Partners IV 2013 U.S. Buyout 4.5 4.8 1.3 0.9 5.7 1.3

24 TA XII-A 2016 U.S. Buyout 5.0 5.3 1.4 0.4 5.7 1.3

25 Fund D 2014 U.S. Venture Capital 3.0 5.3 1.4 0.3 5.6 1.2

26 AEA Investors Small Business Fund III

2016 U.S. Buyout 5.0 4.0 1.1 1.5 5.5 1.2

27 Fund E 2016 U.S. Buyout 5.0 5.2 1.4 0.3 5.4 1.2

28 Riverside Micro-Cap Fund III 2014 U.S. Buyout 2.8 5.0 1.3 0.4 5.4 1.2

29 Graycliff Mezzanine II Parallel 2014 U.S. Mezzanine 7.0 3.8 1.0 1.6 5.4 1.2

30 Banc Fund IX 2014 U.S. Buyout 5.0 5.4 1.4 0.0 5.4 1.2

31–109 Other Various Various Various 496.8 172.3 45.8 32.4 204.7 45.0

Total — Nassau 2019 CFO Portfolio — — — 741.0 375.7 100.0 79.3 455.0 100.0


Portfolio Stratification (% of Total Exposure)

3 Years Old 4 Years Old 5 Years Old 6 Years Old 7 Years Old 8 Years Old 9 Years Old 10 Years Old 11 Years Old > 11 Years

Fund Strategy and Age

(2016 Vintage)

(2015 Vintage)

(2014 Vintage)

(2013 Vintage)

(2012 Vintage)

(2011 Vintage)

(2010 Vintage)

(2009 Vintage)

(2008 Vintage) Old Various Total

Buyout 8 10 4 4 7 3 3 0 1 2 43

Mezzanine 4 10 8 8 2 4 0 0 1 5 41

Venture Capital 0 2 5 1 1 1 0 0 0 3 14

Debt 0 2 0 1 0 0 0 0 0 0 2

Total 12 23 17 13 10 8 3 1 3 10 100

Source: Fitch Ratings.



August 9, 2019

Structural Features

Given the uncertain nature of PE fund distributions and the reliance on market valuations, the

transaction includes structural protections to help the rated notes potentially weather negative

market cycles and depressed valuations when PE distributions may be low. Class A and B

notes are scheduled to begin amortizing approximately two years and nine months after the

transaction closes, as described in the section below, but the notes feature a long legal

maturity of 15 years, which could be supportive in weathering a potential market downturn.

Fitch’s ratings address the timely repayment of the notes at their legal final maturities. The

structure also has a liquidity loan facility to cover operating expenses, interest on class A notes

and capital calls if cash flow is insufficient. These features help mitigate the cyclicality of PE

funds that Fitch considered in its analysis.

Transaction Comparison — At Launch

Nassau 2019 Pte. Ltd Astrea V Pte. Ltd. SWC Funding LLC Astrea IV Pte. Ltd. Astrea III Pte. Ltd.

Sponsor Nassau Azalea/Temasek Sightway/Two Sigma Azalea/Temasek Azalea/Temasek

Closing Date Expected August 2019 6/20/19 8/3/18 6/14/18 7/8/16

Issuance ($ Mil.)

Total Debt Issuance 263 600 216 501 510

Note Maturities (Years)

Legal Final Maturity 15 10 15 10 10

Capital Structure (% of NAV)

Asf 50 35 50 36 30

BBBsf 0 10 — 10 9

BBsf 20 N.A. N.A. N.A. N.A.

Non-Investment Grade or Unrated Debt

0 N.A. N.A. N.A. 6

Equity 30 55 50 54 55

Portfolio

Collateral NAV ($ Mil.) 375.7 1,324.4 432.4 1,098.4 1,141.6

Unfunded (as % of NAV) 21 16 19 15 18

Total Exposure ($ Mil.) 455.0 1,539.4 516.1 1,266.5 1,343.0

No. of Funds 109 38 32 36 34

No. of Managers 69 32 19 27 26

No. of Co-Investments N.A. N.A. 7 N.A. N.A.

No. of Portfolio Holdings 1273 862 244 596 592

WA Fund Age (in Years) 6 5 5 7 7

Allowed to Sell Investments Yes (35%) Yes (15%) Yes (35%) Yes (10%) No

Largest Fund Strategy Exposure with % of NAV

Buyout (43%) Buyout (81%)

Real Asset — Natural Resources — Excluding Oil

& Gas (51%) Buyout (86%) Buyout (77%)

Second Largest Fund Strategy Exposure with % of NAV Mezzanine (41%) Growth Equity (19%)

Real Asset — Natural Resources — Oil & Gas

(22%) Growth Equity (12%) Growth Equity (23%)

Third Largest Fund Strategy Exposure with % of NAV Venture Capital (14%) — Venture Capital (11%) Private Debt (2%) —

Contingent Liquidity Liquidity facility is available to

cover expenses, interest and capital calls. The facility is

sized to 1 year's interest and expenses plus 25% of

unfunded. Initial size is $30 million Also option to require sponsor to cover capital calls.

Liquidity facility to cover expenses, interest and

capital calls. Facility is sized in two parts: (A) starts at $130 million and steps

down and (B) is sized to 50% of unfunded. Initial size

is $238 million.

Liquidity facility is available to cover expenses, interest and

capital calls. The facility is sized to 1 year's class A

interest plus 50% of unfunded. Initial size is $50

million. Also option to require sponsor to cover capital calls.

Two separate facilities: Capital call facility sized to cover the entire unfunded amount of the portfolio. Liquidity facility to cover interest and expenses,

initially sized at $100 million.

Prefunded reserve account to cover the entire unfunded

amount of the portolio. Liquidity facility to cover interests and expenses,

initially sized at $90 million.

N.A. – Not applicable. Source: Fitch Ratings, transaction documents.



August 9, 2019

LTV Ratios

The priority of payments provides for de-leveraging of the issuer on any distribution date when the

LTV ratios are breached, subject to available funds in the structure. The purpose of this feature is to

protect noteholders against declines in NAV that would render the remaining NAV insufficient to

provide future distributions to support the notes. This could happen because of market-wide or fund-

specific stress that causes valuations to decline, or due to distributions, which also reduce the NAV.

There is no requirement to sell fund interests upon a breach of the LTV ratios.

LTV is calculated as the outstanding balance of the liquidity loan facility, the preferred equity, and

the notes divided by the portfolio NAV and the cash collateral account balance. If LTV exceeds the

50% threshold for class A notes, or the 70% threshold for class B notes, 100% of the remaining

cash flow after payment of amounts due under prior clauses of the priority of payments will be paid

in accordance with clauses 7 and 9. Available cash will be applied to the principal repayment of

class A notes until the LTV ratio is no longer in breach of 50%, and then to class B notes until the

LTV ratio is no longer in breach of 70%.

Class B Deferred Interest

The class B note interest will be paid on distribution dates in accordance with clause 8 of the

priority of payments. However, the class A LTV must be 50% or lower before this payment can

be made, in accordance with clause 7 of the priority of payments. If available cash is

insufficient to pay the class B interest, the shortfall will be deferred by adding the shortfall

amount to the principal balance of class B notes. Fitch’s rating on the class B note addresses

timely payment of principal and ultimate payment of interest.

Cash Collateral Account

Prior to the controlled amortization period, the transaction manager may direct the trustee to deposit

cash in the cash collateral account if after satisfying clauses 1 to 5 of the priority of payments, the

LTV ratio for class A and B notes is not higher than 50% and 70%, respectively. Cash can build up

in the cash collateral account up to 100% of the unfunded capital commitments, and, in practice,

cash will accumulate if the NAV appreciates and the manager chooses to use distributions to pre-

fund capital calls rather than let the equityholder receive excess distributions. This cash would be

available to fund capital calls and to de-lever the transaction if the LTV ratios are breached, as

described above. Since the deposit into the cash collateral account is optional, in its modeling, Fitch

assumed that cash is not deposited into the account.

Controlled Amortization Period

The controlled amortization period begins in August 2022 (approximately three years after the

transaction’s close), unless the clean-up amortization is triggered earlier. During the controlled

amortization period, the notes will be paid pro rata from available funds in accordance with clauses

10 and 11 of the priority of payments, 50% to class A and 20% to class B. Fitch views positively the

nature of the controlled amortization, which allows the noteholders to benefit alongside the

equityholders if the portfolio produces strong cash flows.

Clean Up Amortization Period

The clean-up amortization period is expected to commence in February 2025 (approximately

five years and six months after the transaction’s close), whereby available funds will be

directed to the principal payment of class A and B notes, sequentially, until paid in full in

accordance with clauses 12 and 13.



August 9, 2019

However, the clean-up amortization period can go into effect earlier, on the first to occur of (i) a draw

on the liquidity facility to cover a capital call, which is then not repaid within 90 days; (ii) AssetCo fails

to satisfy a fund investment capital call; (iii) less than 20% of the initial principal of the notes is

outstanding; or (iv) acceleration of the notes following an event of default.

Fitch views positively the nature of the amortization period, whereby a significant portion of

cash flows generated by the portfolio will go toward paying down the notes in the early years of

the transaction.

Optional Redemption

During the controlled amortization period, the issuer has the option to partially or fully repay

principal pro rata to class A and B notes from available funds in accordance with clause 14 of

the priority of payments. In addition, the majority holder of the equity may elect for an optional

redemption of the notes in full at any time. Optional redemptions are subject to redemption

premiums, as described in the table at the left. Payments under the controlled and clean-up

amortization provisions discussed above are not subject to prepayment premiums.

Liquidity Loan Facility

A liquidity loan facility will be established, initially with Barclays Bank plc (rated A+/F1 by Fitch),

to fund certain key payments in case of a shortfall in distributions.

Facility Availability and Utilization

The liquidity facility can be used to pay expenses and class A interest (clauses 1 through 4 of the

priority of payments, excluding 3(ii) [preferred equity interest]), as well as capital calls in the event

that available cash is not sufficient to cover these payments. Draws on the liquidity facility to cover

capital calls can be made only to the extent that, subsequently, there is remaining availability under

the facility to cover six months’ interest on the class A notes.

The amount available under the liquidity facility will be $30 million from transaction launch through

May 2022, and, thereafter, the facility size may remain the same or step down, at the discretion of

the manager and the issuer. However, the amount available to borrow under the facility may not be

less than the sum of (x) 25% of remaining unfunded capital commitments plus (y) one year’s

estimated costs of funding clauses (1) through (4) of the priority of payments (excluding interest on

preferred interests, clause 3(ii)). The liquidity loan facility terminates if the notes are fully redeemed

or the notes or the liquidity facility are accelerated.

The relative amount of liquidity available under the liquidity facility for the transaction is lower

than that of previous PE CFOs that Fitch rated. There is a risk that, in the event of a prolonged

drought period where the underlying funds do not distribute sufficient cash to the structure, the

issuer may not be able to cover ongoing expenses or capital calls. Similarly, if the underlying

funds make higher capital calls than expected during a short period, the structure may not be

able to cover them.

These risks are mitigated by the relative maturity of the funds in the portfolio, which means they

generally distribute more cash than they call capital. A greater portion of the unfunded capital

commitments in the portfolio is associated with older funds, relative to other PE CFOs, and these

funds may call less of their stated remaining unfunded commitments. Additionally, a large portion of

the portfolio comprises mezzanine funds that are expected to generate relatively stable income and

are not as reliant on the capital markets to realize cash through sales of holdings. The modeling

scenarios Fitch ran show there was sufficient cushion between cash generated and liquidity facility

availability on the one hand, and the expenses, interest and capital calls on the other hand. In most

Prepayment Premium Period Percentage

From launch to November 2020 4

From November 2020 to November 2021 3

From November 2021 to November 2022 2

From November 2022 until clean-up amortization begins or the outstanding balance of the notes is less than 20% of the initial balance 1

When clean-up amortization begins or less than 20% of the notes’ balance is outstanding 0




August 9, 2019

of Fitch’s modeling scenarios, the liquidity facility was not utilized since there were sufficient

distributions to cover the ongoing cash outlays of the transaction.

Interest and Repayment

Interest on the amount drawn is paid at the rate of London Interbank Offering Rate (LIBOR)

plus 2.25% unless a LIBOR disruption event is in effect. There is an annual 1.00% commitment

fee on the undrawn portion.

The liquidity loan balances may be repaid on any business day and may be re-borrowed by the

issuer. Available funds on any distribution date will be used to pay down the liquidity facility in

accordance of clause 5(i) of the priority of payments. Any loan amount outstanding after this

payment may be repaid on any subsequent business day but is also repayable on the next

distribution date if there are sufficient available funds.

The liquidity facility provider can cancel the commitment or declare the outstanding amount due

and payable if there is an event of default under the liquidity loan facility agreement. Such

events include non-payment of liquidity loan interest or commitment fee when due, any event of

default under the notes and a sale by the sponsor of its equity interest in Nassau CFO without

satisfying certain conditions, among others. The clean-up amortization period will be triggered if

any liquidity loan issued to cover a capital call is not repaid in full for 90 consecutive days.

Liquidity Facility Replacement

The liquidity loan facility provider is required by the transaction documents to have a long-term rating

of at least ‘BBB’ or a short-term rating of at least ‘F2’. In the event that the liquidity loan facility

provider’s ratings fall below these thresholds, the documents require that the provider, at its own

expense, will either deliver a financial guaranty insurance policy or letter of credit that satisfies the

rating criteria or find a replacement provider that satisfies the rating criteria. The time allowed for

replacement by the documents is 30 days. These terms are in line with Fitch’s structured finance

counterparty criteria for the stated note ratings. If in the future the liquidity facility provider is

downgraded below the ratings specified above and is not replaced as stated in the documentation,

and the liquidity facility is determined at that time to be material to the transaction, the rating of the

notes outstanding at that time could be downgraded to be in line with the rating of the liquidity facility

provider at that time.

Funding of Future Capital Calls

AssetCo is the limited partner in the portfolio’s funds and will be required to satisfy all capital

calls made by the funds. However, as AssetCo will not retain any cash in its accounts, it will

rely on resources available to the issuer to meet its capital calls obligations. The issuer may

use cash available in certain of its accounts (payment, issuer, cash collateral and fund

investment contribution accounts) to fund the AssetCo capital call. Cash can be withdrawn from

the accounts for this purpose only if after the withdrawal there remains enough cash (plus any

distributions expected to be received by the next distribution date) to make payments under

clauses 1 through 4 of the priority of payments on the next distribution date.

If cash available in the accounts is not sufficient to satisfy AssetCo’s capital call, then the issuer

may request an advance under the liquidity loan facility.

Alternatively, the issuer may require NNY to make a preferred capital contribution to the issuer

to satisfy AssetCo’s capital call. If the issuer requests that NNY make the preferred capital

contribution, NNY is contractually obligated to make the contribution. However, since the issuer

and the manager are controlled by NNY and its affiliates, Fitch expects that such a request to

make a preferred capital contribution will only happen with NNY’s consent.



August 9, 2019

NNY has a long track record of meeting capital calls made to its portfolio of PE funds, and

currently has access to significant liquidity relative to the capital call obligations it may receive.

Liquidity at NNY is available through its portfolio of liquid securities, as well as through liquidity

facilities available to NNY and its affiliates.

Preferred Equity

As noted above, NNY may contribute capital to the issuer to satisfy an AssetCo capital call.

NNY may also voluntarily contribute capital to the issuer at any time, to be deposited into the

cash collateral account or fund investment contribution account. Once NNY contributes capital,

it will receive preferred limited liability company interests in Nassau CFO, with a notional value

equal to the amount contributed.

The preferred equity will receive a rate of return equal to the interest on the liquidity facility

(payable in accordance with clause 3(ii) of the priority of payments). The preferred equity will

be amortized using available cash in accordance with clause 5(ii) of the priority of payments,

and from that perspective, it is senior to class A notes.

In modeling stress scenarios, Fitch assumed that no capital contributions from NNY materialize.

The potential voluntary capital contributions are not contractual, and the capital call

contributions are likely to only happen with NNY’s consent as noted above. In addition, NNY’s

credit quality is not sufficiently high relative to the ratings of the Nassau CFO notes for NNY to

be relied upon as a counterparty under Fitch’s criteria. However, Fitch views the ability of NNY

to contribute capital positively, particularly given its long track record managing the underlying

PE funds, as well as its position as the majority equity owner (together with its affiliates) of

Nassau CFO.

Fund Dispositions

Nassau has the ability to sell stakes in the underlying PE fund interests at the manager’s

discretion, with certain restrictions. Nassau CFO may sell investments of up to 35% in

aggregate of the portfolio NAV.

Sales of investments can be made to unaffiliated third parties for not less than market value, or

to an affiliate of the issuer or sponsor, for the higher of NAV (adjusted for capital calls and

distributions) and fair market value. Sales to affiliates present clear potential for a conflict of

interests, although Fitch views the floor set on the sale price as a mitigant, and the incentives

for unethical transactions are limited since the sponsor owns the majority of the equity in the

structure and will absorb any losses before noteholders. The issuer may also appoint a

conflicts advisory board to supervise these sales, but Fitch has not relied on it in its analysis

given the optionality of appointing the board.

At each distribution date, net cash proceeds received from a fund disposition will be distributed

in accordance with the priority of payments. The portion of fund disposition proceeds remaining

after payment of clauses (1) to (5)(ii) will be used to pay down the principal of class A notes.

Prepayments of class A notes with fund disposition proceeds in excess of 10% of the initial

portfolio NAV will be subject to a prepayment premium. Fitch views the disposal option as a

positive, as it may allow the manager to realize some of the outstanding NAV if organic

distributions from that NAV come in lower or slower than needed to pay Nassau CFO’s

liabilities. In particular, Fitch views positively that fund disposition proceeds will be used to pay

down the class A principal after certain expenses and interest are paid. Selling fund interests

on the secondary market in a stressed environment will likely require a steep discount, and in

its modeling, Fitch assumed that the fund disposition option was not used.



August 9, 2019

Account Banks and Eligible Investments

Cash or investments held in various accounts within the structure are subject to certain requirements.

Any account banks and any investments must have a short-term rating of at least ‘F2’ by Fitch or a

long-term rating of at least ‘BBB’ by Fitch, at time of investment. Investments must mature before the

earlier of 30 days or the next distribution date. Eligible investments include U.S. government and

agency debt, bank deposits, repurchase agreements collateralized by U.S. government and agency

debt with a counterparty that meets the minimum ratings described above, corporate debt, commercial

paper and money market funds rated ‘AAAmmf’ by Fitch. Account banks that fall below the rating

requirements described above must be replaced within 60 calendar days.

The bank account and investment guidelines meet Fitch’s criteria for qualified investments, and,

therefore, the rating of the notes is not linked to the ratings of the transaction’s bank accounts or

investments. However, if any of the account bank providers are downgraded below the ratings

specified above and are not replaced as stated in the documentation, and the account is determined

at that time to be material to the transaction, the rating of the notes may be downgraded.

Cash Flow Scenario Analysis

As described in Fitch’s criteria, when rating PE CFOs, the structure’s projected performance and

distributions over different market cycles are reviewed to assess whether cash flows are sufficient to

pay off the rated obligations based on the transaction’s structural features.

The performance scenarios for Nassau CFO were constructed based on historical data that matched

the characteristics of Nassau CFO’s portfolio, primarily the types of funds (buyout, mezzanine, debt

and venture capital) and the ages of the funds. For example, about 5% of the portfolio’s exposure

comprises buyout funds that are to be approximately five-year-old funds as of the expected launch of

Nassau CFO in 2019. As a result, Fitch reviewed how five-year-old buyout funds performed over

Transaction Accounts Overview Account Name Owner Account Description

Collection Account AssetCo This account will receive any cash distributions from the funds in the structure. Cash from this account will be swept to the payment account on a daily basis. The notes will have a claim on this account through the AssetCo guarantee.

Custodial Account AssetCo This account will receive any in-kind distributions from the funds in the structure. Cash from this account will be swept to the payment account on a daily basis. The notes will have a claim on this account through the AssetCo guarantee.

Payment Account Issuer Cash will be swept here on a daily basis from the collection account and custodial account. Any proceeds from fund dispositions will also be deposited into this account. Proceeds in this account will be applied to the priority of payments at each distribution date. Funds in this account may be used to satisfy a capital call on the structure. The notes will have a claim on this account.

Cash Collateral Account Issuer The issuer has discretion to direct funds to this account prior to the class A note controlled amortization period of the transaction with the primary objective of funding future capital calls. The maximum amount that is allowed to be held in the account will be the aggregate amount of unfunded capital commitments. As capital commitments are made, any excess funds above the remaining unfunded amount will be released to the payment account. Money in this account can also be used to de-lever the structure upon a LTV breach. The notes will have a claim on this account.

Fund Investment Contribution Account

Issuer This account will hold additional funds that NNY injects into the structure to meet a capital call in relation to its guarantee to fund capital calls in the event of a shortfall in the structure. Proceeds will be used to fund capital calls only. The notes will have a claim on this account.

Capital Call Account AssetCo This account will receive funds from the issuer to fund capital calls on the structure. The notes will have a claim on this account through the AssetCo guarantee.

Issuer Account Issuer The manager will have discretion to deposit all or a portion of the remaining funds at the bottom of the waterfall into this account to fund future capital calls, future prepayments of the notes, prepayment of expenses or payments to the issuer for distribution to the equity. The notes will have a claim on this account.

Source: Fitch Ratings, Nassau 2019 CFO.



August 9, 2019

different economic cycles. These scenarios correspond to previous economic cycles observed over

15-year intervals to match the legal final maturity of the Nassau CFO rated notes.

For example, in one scenario, Fitch reviewed how a portfolio similar to Nassau CFO’s current profile

would have performed during the 15-year period between 2001 and 2016 (in the tables of the

results section referred to as the start-year 2001 scenario, labeled “2001”). The key data points in

the analysis are (1) how much capital the underlying funds called, (2) how much cash the underlying

funds distributed and (3) the NAV appreciation or depreciation that was driving distributions.

In addition, Fitch stressed the resilience of the structure to potential underperformance in

Nassau CFO’s underlying funds. For example, while the portfolio comprises relatively balanced

funds as measured by quartiles, in some of the scenarios Fitch ran, all the funds’ performance

was assumed to have deteriorated to fourth-quartile levels, which negatively affected their

projected distributions and other performance measures. In measuring the results of the

scenarios, Fitch focused on key metrics, such as the ability to make timely interest and

principal payments with respect to the legal final maturity of the rated notes, total cash flow as

a percentage of the transaction NAV, the repayment periods, the use of distributions in the

structure and how various structural protections drove performance of the transaction (LTV

triggers, liquidity loan facility and so on).

The various launch year scenarios Fitch ran are displayed in the tables below.

Results

The ‘Asf’ rating of class A notes reflects that, under all fourth-quartile performance projections Fitch

ran, class A notes made all timely interest and principal payments with respect to their legal final

maturity of 15 years. In all cases, class A notes were repaid by the final maturity date with the ratios

of distributed cash to the class A principal amount (and payments senior to it like expenses and

interest) varying between 1.3x and 1.7x in these scenarios. Class A notes were fully paid off in year

9.25 under the most punitive scenario.

The ‘BBsf’ rating of class B notes reflects that, under all third-quartile performance projections

Fitch ran, class B notes made all ultimate interest and timely principal payments with respect to

their legal maturity of 15 years. The principal payback period for class B notes varied between

approximately six and nine years. Cash flow coverage varied between 1.3x and 1.7x for class

B notes. Class B notes pass under Fitch’s third-quartile scenarios, implying a ‘BBBsf’ rating.

Launch Year Scenarios for Class A Notes — Fourth-Quartile Performance

Launch Year Scenario

Class A Notes

Payback Period

(Years)

Class A Cash Flow

to Principal Coverage

(x)

% of Collateral

NAV Remaining

After Payback

Class A WAL

Class A Max LTV

Gross Cash Flow (% of

Initial NAV)

Capital Calls Paid

(% of Initial NAV)

Expenses and Interest

Paid (% of Initial NAV)

Class A Note

Principal Paid (% of

Initial NAV)

Class B Note


Initial NAV)

Equity Distribution

s (% of Initial NAV)

2000 7.00 1.48 19 3.80 50 119 15 20 50 20 14

2001 7.50 1.38 14 3.86 54 114 16 21 50 20 7

2002 8.00 1.50 11 3.84 54 120 16 20 50 20 15

2003 8.75 1.63 12 4.27 50 134 17 22 50 20 25

2004 9.00 1.57 13 3.90 50 126 15 21 50 20 20

2005 9.25 1.52 18 4.36 52 130 15 25 50 20 19

2006 8.50 1.55 20 4.43 52 131 16 24 50 20 21

2007 8.00 1.39 21 4.33 56 119 16 24 50 20 9

2008 8.00 1.31 18 4.43 57 113 14 26 50 20 3

2009 8.50 1.50 14 4.77 50 125 12 25 50 20 18

2010 8.50 1.66 16 4.91 50 138 13 25 50 20 30

2011 8.50 1.56 14 4.70 50 130 14 25 50 20 22

2012 8.50 1.57 13 4.49 50 131 15 23 50 20 22

2013 7.75 1.64 16 4.15 50 132 15 21 50 20 25

Note: Equity distributions include performance incentive fee. Source: Fitch Ratings.



August 9, 2019

However, Fitch’s criteria restrict investment-grade ratings to notes issued at LTV at or below

50%. Since class B notes are issued at a higher LTV, their rating is notched down to the

highest below-investment-grade category possible.

020406080100120140160

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(% of NAV)

2019 (LHS) 2020 (LHS) 2021 (LHS) 2022 (LHS) 2023 (LHS) 2024 (LHS) 2025 (LHS) 2026 (LHS)

2027 (LHS) 2028 (LHS) 2029 (LHS) 2030 (LHS) 2031 (LHS) 2032 (LHS) 2033 (LHS) Total (RHS)


% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(Fourth Quartile)

(%)

Launch Year Scenarios — All Quartile Performance


Class A Notes Payback

Period (Years)

Class B Notes Payback

Period (Years) Class A

WAL Class B

WAL


Initial NAV)

Capital Calls Paid (% of

Initial NAV)

Expenses and Interest Paid

(% of Initial NAV)

Class A Note Principal (% of

Initial NAV)

Class B Note Principal (% of

Initial NAV)

Equity Distributions (%

of Initial NAV)

2000 6.00 6.25 2.90 3.09 130 11 15 50 20 35

2001 6.25 6.50 3.24 3.85 135 13 17 50 20 35

2002 6.00 6.50 3.36 3.56 150 14 17 50 20 49

2003 6.50 7.25 3.54 3.72 181 14 18 50 20 79

2004 7.50 8.25 3.44 3.74 176 14 18 50 20 75

2005 7.25 8.00 3.72 4.32 177 13 19 50 20 75

2006 7.00 7.75 4.05 4.73 180 16 21 50 20 74

2007 7.00 7.50 3.80 4.58 155 14 20 50 20 51

2008 6.50 7.00 4.12 4.69 147 16 21 50 20 40

2009 6.50 7.00 4.63 4.95 186 17 25 50 20 75

2010 6.50 7.25 4.21 4.49 184 13 21 50 20 79

2011 6.75 7.50 3.98 4.27 174 15 20 50 20 70

2012 6.50 7.25 4.00 4.27 181 14 20 50 20 77

2013 6.50 7.00 3.97 4.22 180 15 20 50 20 75


Launch Year Scenarios for Class B Notes — Third-Quartile Performance


Class B Notes

Payback Period

(Years)

Class B Cash Flow

to Principal Coverage

(x)

% of Collateral

NAV Remaining

After Payback

Class B WAL

Class B Max LTV


Initial NAV)

Capital Calls Paid

(% of Initial NAV)

Expenses and Interest

Paid (% of Initial NAV)

Class A Note


Initial NAV)

Class B Note


Initial NAV)

Equity Distribution

s (% of Initial NAV)

2000 6.75 1.37 17 3.46 70 133 15 16 50 20 32

2001 6.75 1.34 17 3.56 74 130 14 16 50 20 30

2002 7.25 1.44 13 3.59 71 139 14 17 50 20 38

2003 8.00 1.63 14 4.12 70 160 15 19 50 20 56

2004 8.75 1.58 13 4.35 70 158 16 20 50 20 52

2005 8.00 1.61 18 4.50 73 161 16 20 50 20 55

2006 7.75 1.61 24 4.42 75 158 14 20 50 20 55

2007 7.25 1.50 25 4.40 77 150 16 19 50 20 45

2008 7.75 1.41 20 4.73 75 144 16 21 50 20 37

2009 7.25 1.64 27 4.86 70 167 16 22 50 20 59

2010 7.25 1.68 25 4.78 70 170 16 22 50 20 62

2011 7.50 1.59 21 4.50 70 159 15 21 50 20 54

2012 7.25 1.66 19 4.32 70 165 15 20 50 20 59

2013 7.00 1.69 21 4.18 70 165 14 19 50 20 62




August 9, 2019

In addition, the disposal option discussed above is an additional positive qualitative factor to

consider, which was not specifically modeled in the scenarios Fitch ran since it is at the discretion of

the manager. By exercising the disposal option, the manager may accelerate realization of the NAV

on the secondary market but likely at a steep discount in a stressed market.

The charts below show the progression of the LTV ratio over the life of the transaction in different

start year scenarios. The 2008 fourth-quartile launch year scenario experienced the highest LTV

levels, which was primarily driven by weak distributions and a steep decline in valuations from the

underlying funds in the first year. In year 1, the LTV ratio was breached, and from then on, available

cash was redirected to pay down the class A principal. In the following years, distributions and

valuations improved, which allowed the structure to cure the LTV ratio by year 3 and fully repay

class A notes by year 8.

Additional charts below show the projected annual progression of the transaction under the 2005

and 2008 launch year scenarios.

020406080100120140160180200

05

1015202530354045

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(% of NAV)



% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(All Quartiles)


(%)

020406080100120140160180

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(% of NAV)




% NAV Distributed Per Launch Year Scenario Over Projected 15-Year Life of Nassau(Third Quartile)

(%)



August 9, 2019

0102030405060708090

2000 2001 2002 2003 2004 2005 2006

2007 2008 2009 2010 2011 2012 2013


(%)

Class A LTV Progression in Stress Scenarios by Start Year Scenario(Fourth Quartile)

0102030405060708090

2000 2001 2002 2003 2004 2005 2006

2007 2008 2009 2010 2011 2012 2013


(%)

Class B LTV Progression in Stress Scenarios by Start Year Scenario(Third Quartile)

0102030405060708090

020406080

100120140

(%)(Mil.)

Transaction Waterfall Progression

Capital Calls (LHS) Fees (LHS) Class A Interest (LHS)

Class A Principal (LHS) Class B Interest (LHS) Class B Principal (LHS)

Equity (LHS) Class A LTV (RHS) Class B LTV (RHS)


2005 Transaction Launch Year — All Quartiles

- 10 20 30 40 50 60 70 80 90

020406080

100120140

(%)(Mil.)

Transaction Waterfall Progression

Capital Calls (LHS) Fees (LHS) Class A Interest (LHS)Class A Principal (LHS) Class B Interest (LHS) Class B Principal (LHS)Equity (LHS) Class A LTV (RHS) Class B LTV (RHS)


2008 Transaction Launch Year — All Quartiles



August 9, 2019

Fitch also ran various stress scenarios beyond the standard launch year scenario analysis

described above. As noted above, Fitch identified about 6.6% of funds by NAV that in one stress did

not receive any credit. In the 2008 launch year scenario under the fourth-quartile stress, this

reduced distributions as a percentage of NAV from 113% to 110%, and the payback period for the

A notes remained at 8 years. Under the same scenario using the third-quartile stress, distributions

as a percentage of NAV decreased from 144% to 138%, and the payback period for the B notes

remained at 7.75 years.

In another stress to test the sensitivity to the data being used, for vintages older than 2015

where there is thinner historical data in early launch year scenarios, Fitch replaced the

mezzanine historical data with data for a broad category of debt funds, which is more punitive

because more risky strategies like distressed debt and direct lending are included. In the 2008

launch year scenario under the fourth-quartile stress, this reduced distributions as a

percentage of NAV from 113% to 102%, and extended the payback period for the A notes from

eight years to nine years. Under the same scenario using the third-quartile stress, this reduced

distributions as a percentage of NAV from 144% to 138%, and extended the payback period

for B notes from 7.75 years to 8.00 years.

Testing the sensitivity of the portfolio’s valuations, in the 2008 launch year scenario under the

fourth-quartile stress, the break-even haircut to NAV at launch for A notes is 13%. The same

figure for B notes under the third-quartile stress is 26%. For the 2005 launch year scenario, the

break-even NAV haircut at launch is 28% for A notes under the fourth-quartile stress and 37%

for B notes under the third-quartile stress.

Valuations

PE fund valuations are generally made available quarterly on an unaudited basis and annually on

an audited basis. Fund managers apply various valuation methods (discounted cash flow analysis,

multiple analysis and so on) to the underlying holdings of the funds. Valuations are made as of a

certain date and are reported to the LPs a few months following the valuation reference date.

Valuation methods can vary from fund to fund, as managers have discretion on the applied

techniques. However, these valuations are prepared in accordance with International Financial

Reporting Standards or generally accepted accounting principles in the U.S. or elsewhere.

Managers may report on the valuation methods applied to each underlying holding. While most GPs

do not specify exactly how they valued their funds’ holdings, Fitch reviewed a sample as well as the

top underlying portfolio holdings for the reasonableness of valuations where reporting was available.

For example, a venture fund in the portfolio acquired a technology company during its series A-1

funding. After six years and three additional investments by the fund, the company was valued at

approximately an 8.0x multiple based on the company’s latest funding round. The portfolio company

experienced another large increase in valuation owing to a bid the fund was expecting for an

acquisition. The company was acquired in the following quarter at a 22.0x multiple.

The initial valuation of Nassau CFO was based on the reported NAVs of the funds as of the latest

reported NAV valuation date. Most of the reported NAVs of the funds were valued as of March 31,

2019, with six of the reported NAVs of the funds valued as of Dec. 31, 2018. The NAV valuations for

each fund were then adjusted for any capital calls and distributions made between the time of

valuation and June 30, 2019.

Going forward, the valuation of the structure’s NAV will be made at each determination date based

on the most recent audited or unaudited NAVs provided by the underlying GPs. The valuations

provided by each GP will be adjusted for any distributions (subtracted from NAV) and capital calls

(added to NAV) made between the reference date of the GP’s valuation and the distribution date of

the structure. Recording the NAVs of the underlying funds, and then building those into the overall



August 9, 2019

PE CFO NAV is the responsibility of the transaction manager. The structure’s NAV will be reconciled

to the underlying funds’ capital accounts during the annual audit of the structure.

The Manager

Fitch considers NAI suitably qualified, competent and capable of executing its transaction functions

as the investment manager of Nassau CFO.

Nassau Financial Group is an insurance company founded in 2015 with PE fund backing, with $19.6

billion in assets under management across fixed income and alternatives, as of March 31, 2019.

Since 2016, Nassau Financial Group acquired several insurance companies, including The Phoenix

Companies and Constitution Life. Nassau Asset Management LLC (NAMCO) provides investment

management services to certain of its affiliates, including NNY. NAI is a subsidiary of NAMCO and

will act as the investment manager for Nassau CFO.

NAMCO has four investment management platforms, NAI, Nassau Corporate Credit, Nassau

CorAmerica and Nassau Private Credit (three of which are registered investment advisers). NAMCO

manages Nassau’s $19.6 billion in AUM across high-grade private placements, CLOs, commercial

mortgage debt and alternatives. NAI is an SEC registered adviser. NAMCO has 29 employees

across all investment management platforms, with four employees currently at NAI. NAI expects to

increase the number of employees as its platform expands. NAI has access to operational

resources made available by NAMCO to assist in managing Nassau CFO.

The investment manager and its affiliates and employees have a long track record investing in PE

beginning in the 1980s, and the management team has significant experience in the sector. Fund

investments span multiple strategies including buyout, venture capital, mezzanine debt, and co-

investment opportunities in equity and mezzanine debt.

NAI’s stand-alone PE team consists of four investment professionals. In recent years, the staff at

NAMCO involved in investment and operational decisions for the PE portfolio included six members

on the investment committee, five on the investment staff (with one overlapping the staff and the

committee), and six operational staff members. Most of the PE experience comes from two existing

investment professionals and two previous staff members, with one key professional primarily

focused on the relationships with the fund managers, sourcing PE investments and analyzing

investments. This may pose a key man risk to the transaction. However, NAMCO has in recent

years increased its staff. In addition, Nassau CFO is a static portfolio of mature PE investments

without a reinvestment period. The portfolio is not expected to require very active management that

would involve significant investment decisions to be made once the transaction is launched. Material

decisions of the investment manager will likely be limited to fund dispositions as allowed by the

transaction documents. NAMCO’s broader experience and staffing actively managing CLOs and

real estate may be able to support NAI’s role as investment manager in Nassau CFO if needed. A

significant portion of the work required by the manager will be focused on operational aspects of the

funds and the transaction, such as funding fund capital calls, and recording and reporting on cash

flows and NAV. Fitch views the static portfolio, limited active management, NAMCO’s broader

investment management platform, as well as the presence of other personnel with PE experience,

as mitigants to the relatively smaller size of the NAI team.

The investment manager will manage the fund investments, administer key fund matters, manage

eligible investments, supervise the administration of assets and notes, make capital calls on the

issuer, operate the liquidity facility, manage cash flows in accordance with the priority of payments,

manage investor relations and reporting to stakeholders, and perform various other administration

and management services with respect to AssetCo and the issuer.

The manager will enter into a management agreement with the issuer and will receive a

management fee for performing such services. The fees to the manager include a senior fee of



August 9, 2019

0.50%, a junior fee of 0.25%, and a performance incentive fee equal to 10% of the cumulative

distributions to the equity after an 8% equity return performance hurdle is met. The fees for Nassau

CFO were structured to be similar to the fees of a PE fund of funds.

NAI has been appointed to act as the investment manager until AssetCo and Nassau CFO are

dissolved. Either the issuer or AssetCo can terminate the services of NAI as investment manager at

any time for certain reasons as specified in the management agreement, such as for failing to fulfill

its responsibilities or missing a capital call. Absent the occurrence of a specific termination event, the

investment manager may resign upon 30 days’ written notice provided to AssetCo, the issuer and

the trustee.

However, the termination or resignation shall not be effective until the appointment of a

satisfactory replacement investment manager whose appointment does not result in the reduction

or withdrawal of the ratings on the notes. If no replacement investment manager has been

engaged within 60 days after the applicable notice of termination or resignation, the investment

manager, AssetCo or the issuer may petition a court for the appointment of a duly registered

investment adviser to serve as a replacement investment manager. Fitch believes these terms

provide a sufficient procedural framework to find a suitable replacement investment manager in

the event one should become necessary.

Alignment of Interests

Fitch observes an alignment of interests in this transaction between the sponsor and noteholders

given the sponsor’s equity commitment in the transaction. The sponsor and its affiliates will maintain

at least a majority ownership of the equity position. As the owners of the equity, the sponsor and its

affiliates will bear any losses of the structure prior to noteholders, providing for the alignment of

interests.

Security and Bankruptcy Remoteness

Noteholders and the liquidity facility are secured by the assets of the issuer, including its

accounts and its interest in AssetCo. PE fund interests are generally prohibited by their

partnership agreements from being pledged as collateral. For this reason, the dual SPV

structure is common in PE CFOs, where AssetCo holds the PE fund interests and the issuer

pledges its interest in AssetCo to noteholders. AssetCo is also guaranteeing the notes to give

noteholders a direct claim against AssetCo, and it gives noteholders a perfected security

interest in AssetCo’s bank accounts and the money in those accounts.

Fitch expects that in a default scenario, noteholders and the trustee may decide whether to continue

waiting for additional distributions from underlying funds, sell interests in AssetCo as a whole to raise

cash to repay the issuer’s obligations, or obtain consent from the GPs of underlying funds and sell

individual fund interests on the secondary market. Fitch believes GPs are likely to provide consent to

transfer fund interests, as the GPs would likely prefer to have non-defaulted limited partners.

Fitch notes that ongoing material obligations, like the unfunded capital commitments of AssetCo, are

unique to PE CFOs and unusual in structured finance transactions. This presents a risk that if

AssetCo does not meet a capital call obligation, one or more GPs of the portfolio’s funds may

pursue claims against AssetCo, and potentially cause it to enter bankruptcy proceedings. However,

there are a number of mitigants to this risk. Fitch’s analysis takes into account the transaction’s

available liquidity and ability to pay capital call obligations, assessing the risk that capital calls are

not paid due to insufficient cash flows. Fitch also reviews the transaction manager’s operational

capabilities and historical performance in meeting capital calls, as well as the alignment of incentives

between the manager and noteholders, to assess the risk that capital calls are not paid due to

mismanagement. The manager also has the ability to deliberately not pay capital calls in limited

circumstances, such as if it disputes the validity of the capital call or if it believes it is not in the best



August 9, 2019

interest of the transaction to pay the capital call. In that case, we believe it is unlikely that a GP will

be able to successfully cause a bankruptcy filing of AssetCo. Finally, GPs historically exercised

other remedies available to them to address a default on a capital call, aside from pursuing a claim

or bankruptcy proceeding against the LP, because of the time, expense and potential reputational

damage associated with a GP’s pursuing claims against its LPs. A typical remedy to capital call

defaults includes forfeiture of some or all of the LP’s interest in the fund. For the reasons above we

consider the bankruptcy risk to AssetCo associated with its capital call obligations as sufficiently

remote within the scope of Fitch’s rating.

Fitch has not yet received and reviewed legal opinions related to the transaction.

Fitch expects that the opinions will provide that the issuer is bankruptcy remote, that its assets

cannot be consolidated with those of the sponsor and that the transfer of the fund investments under

the purchase agreements would be characterized as a sale of rights over the fund investments and

would not be regarded as property of the seller in the event of the seller’s insolvency. If the legal

opinions Fitch receives are not in line with its criteria, this could lead to final ratings different from the

expected ratings noted in this report.

The Model

Fitch performed the cash flow analysis of the structure using a model to forecast hypothetical

portfolio cash flows using historical PE data. PE data were sourced from a third-party data provider

and covered all quartiles of funds with vintages ranging from 1990 to 2018. The dataset

encompassed buyout, mezzanine, debt and venture capital funds to parallel the underlying

breakdown of the Nassau CFO portfolio. The major data points driving the analysis include historical

capital calls, historical distributions and historical NAV appreciation and depreciation. The historical

data within each dataset were extrapolated to simulate the average historical cash flow of a

representative PE fund. The historical cash flows were built up, as described in the Cash Flow

Scenario Analysis section, to forecast the cash flows of Nassau CFO’s portfolio of PE holdings.

The model applied the cash flows, as described above, to the priority of payments (see Appendix,

pages 2122) to simulate the performance of the transaction.

Additionally, the model allowed hypothetical launch dates for the transaction to forecast

performance if Nassau CFO was launched during various market cycles. This analysis used

observed historical cash flows where available and applied these to the underlying portfolio based

on the PE fund age and strategy profile of Nassau CFO’s holdings. This model provided the ability

to run the analyses described in the Cash Flow Scenario Analysis section.

For example, if the transaction was launched in 2005 and 10% of the NAV comprised two-year-old

buyout funds at that time, the model would apply the observed historical performance for two-year-

old buyout funds in 2005 to 10% of the portfolio. This would then be replicated for the remaining

90% of the portfolio NAV for the observed performance of each age and strategy in 2005. The

analysis would then apply the same methodology to the remaining life of the transaction where

historical performance data are available. If no data are available for a certain age in a certain year,

the model applies the average historical performance for that age and strategy across vintages.

Surveillance of the Transaction

Fitch relied on information on the underlying funds for its analysis and will continue to do so for

the ongoing surveillance of Nassau CFO. Fitch will also receive quarterly reporting from the

issuer on an ongoing basis throughout the life of the transaction, which aligns with the

distribution dates of the notes. Quarterly reporting will detail any cash flows for the period

(distributions, capital calls and so on), balances of assets and liabilities, qualified investments,



August 9, 2019

periodic payments made at each level of the structure’s waterfall, LTV calculations and

updated valuation data for Nassau CFO’s PE holdings.

Rating Sensitivities

PE collateralized fund obligations have many inherent risks, including the uncertainty of the amount

and timing of distributions, illiquid nature of investments, the degree of transaction leverage and the

subjective nature of NAV calculations.

The expected ratings for the notes may be subject to downgrade if cash flows are lower than

modeled in stress scenarios, creating a risk that the funds will not generate enough overall cash to

repay the issuer’s obligations. A material decline in NAV that, in Fitch’s view, would indicate

insufficient forthcoming cash distributions to support the notes could also lead to rating downgrades.

The ratings of class B notes may be upgraded in the future if distributions are strong and CE on the

class B notes increases. The ratings uplift on class B notes will be subject to the rating cap for PE

CFO transactions and the rating cap of the ‘Asf’ category owing to the deferred interest feature of

the class B notes.

A ratings downgrade of a counterparty may also materially affect the ratings of the notes, given the

reliance of the issuer on counterparties to provide functions, including providers of the liquidity loan

facility and bank accounts.

Fitch relied in its analysis on the legal documentation and opinions for the transaction. If any relevant

party to the transaction does not follow its responsibilities and procedures as described in the

documentation, the ratings on the notes may be affected.



August 9, 2019

Appendix: Terms of the Notes

Ordinary Priority of Payments

Unless a liquidation event has occurred and is continuing, on each distribution date, payments

are to be made using all funds on deposit in the payment account on the determination date in

the following order of priority:

1. Payment to (x) and (y) with an annual cap of $500,000:

(x) First, taxes and registration and filing fees.

(y) Second, administrative expenses in the following order of priority:

(i) Trustee and calculation agent expenses with an annual cap of $250,000.

(ii) Liquidity facility expenses other than commitment fees and interest.

(iii) Issuer and AssetCo fees and expenses.

(iv) Investment manager fees and expenses.

2. Payment to:

(i) First, commitment fees of the liquidity facility.

(ii) Second, senior management fees.

3. Payment to:

(i) First, accrued and unpaid interest on the liquidity facility.

(ii) Second, return on the preferred interests.

4. Accrued and unpaid interest on the class A notes.

5. Payment to:

(i) First, outstanding balance on the liquidity facility.

(ii) Second, outstanding preferred interest amounts.

(iii) Third, from proceeds from selling fund investments only, to the payment of

class A notes with the prepayment premium.

6. Prior to the controlled amortization period, to the cash collateral account at the

discretion of the investment manager as long as it does not cause an LTV

breach.

7. If the LTV ratio is greater than 50%, to the principal of class A notes until the LTV

ratio is equal to 50%.

8. Payment to:

(i) First, accrued and unpaid interest on class B notes and class B deferred

interest.

(ii) Second, class B deferred interest.

9. If the LTV ratio is greater than 70%, to the principal of class B notes until the LTV

ratio is equal to 70%.

10. During the controlled amortization period, to the principal of class A notes at 50%

of the remaining available funds after clause 9 up to the outstanding balance of

class A notes.

11. During the controlled amortization period, to the principal of class B notes at 20%

of the remaining available funds after clause 9 up to the outstanding balance of

class B notes.

12. During the clean-up amortization period, to the principal of class A notes until

class A notes are paid in full.

13. During the clean-up amortization period, to the principal of class B notes until

class B notes are paid in full.



August 9, 2019

14. During the controlled amortization period, at the discretion of the issuer, optional

repayment pro rata to the class A notes and class B notes plus the applicable

prepayment premium.

15. Payment, on a pro-rata basis, to:

(i) Administrative expenses in excess of the annual cap.

(ii) Excess interest due if notes are accelerated.

16. At the discretion of the investment manager, to the issuer account to fund future

capital calls, future prepayments on the notes, future repayment of the liquidity

facility or preferred interests, or future payment of administrative expenses.

17. Payment to subordinate management fees.

18. Before the performance threshold is met, payment to equityholders.

19. After the performance threshold is met, payment to the investment manager until

the investment manager receives 10% of the total distributions received under

clauses 18 and 19.

20. 10% of remaining funds to the investment manager for the performance incentive

fee and 90% to the equityholders.

Liquidation Priority of Payments

If a liquidation event has occurred and is continuing, on each distribution date, payments are to

be made using all funds on deposit in the payment account, issuer account, cash collateral

account, fund investment contribution account not needed to pay capital calls, and any

proceeds of AssetCo collateral (includes collection account, custodial account and capital call

account), on the determination date in the following order of priority:

1. Payment to clauses (1) and (2) of the ordinary priority of payments without regard

to annual caps.

2. Payment to:

(i) First, accrued and unpaid interest on the liquidity facility.

(ii) Second, return on the preferred interests.

(iii) Third, outstanding principal of the liquidity facility.

(iv) Fourth, outstanding preferred interest amounts.

3. Payment to the accrued and unpaid interest on class A notes.

4. Payment to the principal of class A notes until class A notes are paid in full.

5. Payment to the accrued and unpaid interest on class B notes.

6. Payment to the principal of class B notes until class B notes are paid in full.

7. Payment to subordinate management fees.

8. Before the performance threshold is met, payment to equityholders.

9. After the performance threshold is met, payment to the investment manager until

the investment manager receives 10% of the total distributions received under

clauses 8 and 9.

10. 10% of remaining funds to the investment manager for the performance incentive

fee and 90% to the equityholders.



August 9, 2019

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