GPs borrow more to put skin in the game – Exclusive

Research from Investec has found more than a fifth of managers expect to use external financing to fund their GP commitments.

European fund managers are increasingly turning to external financing to fund their GP commitments, Investec’s latest Fund Finance GP Trends report finds.

21 percent of GPs said they are expecting to fund their GP commitments using external financing, up from 14 percent last year.

“A lot of our conversations would suggest that there are a number of firms where there’s a split in the team as to how easy it is to finance commitments,” Matt Hansford, a member of the fund finance team at Investec, told Private Equity International.

Hansford said the increase in use of external financing is unlikely to be connected to the prevalence of such facilities, as they remain fairly specialised.

“We don’t see lots of banks coming to market to offer this. It’s relatively small in terms of the quantums that you’re usually financing, and it can be quite fiddly because people have different corporate structures, motivations and requirements. So it doesn’t fit a product mentality.”

In a multiple choice question in which respondents could select more than one answer, almost half – 49 percent – of respondents expect to use existing resources, and 49 percent are expecting to reinvest carry from previous funds, while 18 percent will use financing from their firm of senior partners. Nine percent said they don’t know how they will meet their GP commitment.

Junior partners who have yet to experience multiple fundraising cycles, or who have been promoted either during or in the aftermath of the global financial crisis, may not have capital reserves to fund GP commitments upfront.

Many firms are also looking to broaden the carried interest sharing programme beyond a few partners at the very top to include those in the tiers below. “A lot of firms want the whole team to make a meaningful commitment. There’s a level of experience [for whom] it’s just more difficult,” Hansford said.

When it comes to the proportion of the fund’s overall fundraising total GPs are looking to commit, there’s little change from last year.

“They may be raising a slightly larger fund but they’re putting a consistent percentage commitment in, so the dollar amount is bigger. In general terms, over the last few years there’s certainly been an upwards movement in terms of the amount teams are committing.”

The greatest proportion of respondents – 41 percent – are expecting to commit between 1 and 2 percent.