Kohlberg & Co. wants to give investors a way into an expanding but risky area of the debt market. The private equity company filed Friday to raise $225 million by selling the public shares in a closed-end investment fund. Kohlberg's Kohlberg Capital affiliate will use proceeds to acquire a $200 million fund made up of first- and second-lien loans. Second-lien loans give less creditworthy companies better access to capital. Lenders get higher interest payments but also a greater risk of default. Loan issuance has risen sharply in recent years, according to industry data. "Issues in the second-lien loan market have been recently reached unprecedented levels," says Faris Khan, editor-in-charge of syndicated loans at the Loan Pricing Corporation. "Second-lien loans are relatively new, but overall credit markets have been extremely bullish for close to 18 months." As the market for second-lien loans heats up, profiting from closed-end fund deals becomes easier. "They are taking an illiquid asset, like these loans, and people can effectively own small portion of the loan without having to deal with the illiquidity," says Matthew Rhodes-Kropf, finance professor at Columbia Business School. "As liquidity picks up, shares of a fund will trade higher than the underlying value of the fund. So someone like Kohlberg gets more likely to do this deal in a market that is becoming more liquid."