Credit facilities became the talk of the industry after Oaktree Capital Management’s Howard Marks covered the topic in a typically idiosyncratic memo. The Institutional Limited Partners Association swung into action and issued guidance on the use of subscription credit lines by private fund managers.
In December, the Fund Finance Association, a non-profit industry association for the fund finance market, published its analysis of the guidelines.
The FFA says it considers them “a constructive and productive attempt to analyse the benefits and detriments of facilities and an effort to define best practices” and hopes ILPA will refine the guidelines so that fund sponsors and their LPs can “continue to obtain the benefits and utility of facilities”.
The response shows how difficult it is to come up with guidelines that are applicable across private funds without morphing into a document so unwieldy neither LPs nor GPs ever use it.
The FFA addresses each of ILPA’s nine recommendations. It broadly supports those relating to transparency and disclosure, but argues this is “a matter best agreed to between a fund sponsor and the investors (preferably in a manner that does not unduly burden funds to report additional information of only marginal value to the investors)”.
But the lobby group takes issue with the last recommendation, about limitations around the facility. Among ILPA’s suggestions are a 180-day clean-down and a maximum facility size of 15-25 percent of the overall fund size. The FFA calls this a “one-size-fits-all” approach, not suited to an industry where there are thousands of funds with different circumstances.
“The recommendations do not take into account the individual investment strategies, the availability of asset-level financing and fund-specific timing considerations,” the FFA writes.
For example, a buyout fund may use less fund-level leverage as it levers heavily at the portfolio company level, while a private credit or secondaries fund will typically look to lever a portfolio of investments.
Along with recommending the guidelines acknowledge this, the FFA recommends the clean-down not apply during between first and final close to eliminate true-ups. The cap on facility size should be based on anticipated, not actual, fund size, “otherwise, the facility during the fundraising period may be too small to finance even the initial investment”.
The FFA also raises concerns that the ILPA guidelines conflate subscription lines with other fund finance leverage and liquidity products and, if applied literally, would “prohibit other very viable and needed fund financing tools with no obvious corresponding benefit to investors”. These include fund-level leverage on debt and secondaries funds, which typically have advance rates based on net asset values and can be secured by investments.
Ultimately, the FFA argues the ILPA guidelines should “promote a solution-oriented approach that better reflects the broad range of funds, the diverse group of investors and their respective investment strategies”, and sees them as a starting point to “foster greater dialogue and awareness” within the LP and GP communities. For its part, ILPA states its guidance will “continuously reflect member feedback and new market conditions”.