When did private fund managers begin using subscription lines of credit and how has it evolved?
Jeff Johnston: The product had been in existence for some 20-odd years in its current fashion. The longest, deepest penetration has been in the real estate sector. Ten or 15 years ago, almost every commercial real estate fund had a subscription facility.
In the last decade, the growth has been in the other sectors including buyout funds, secondaries and private debt. In 2012, when fundraising activity picked up again, lending activity to funds picked up again as well. Banks who had exited the market during the financial crisis re-entered and started lending again.
Anecdotally, when I look at PEI 300 and at the top 100 fundraises in the past five years, I can go down the list and I can say that virtually every one of those firms uses subscription lines.
What was the purpose of founding the Fund Finance Association?
JJ: As banks were starting to recapitalise and funds were raising money, lender interest in fund finance and subscription facilities increased significantly. At Wells Fargo [where Johnston is the head of origination in the subscription finance group], we had a pretty meaningful practice doing large syndicated transactions and we needed the bank market to grow to have enough lenders to fill the syndicates for large transactions that were being done. A lot of it became educational in helping other lenders get an understanding of the market, of the product, of the structure details. The FFA conferences for example had a heavy market and product educational focus in the early stages. Now it's starting to become an educational tool for GPs [rather than lenders].
How do GPs typically document the use of fund finance with their LPs?
Mike Mascia: What we did early on, and in some deals still do today, was to have an investor acknowledgement letter. But it can be a burden for the funds to go to all the investors for big funds and sign up let's say 300 of those. So the trend more recently has been for that language to be included into the fund's partnership agreement. Most deals now instead of requiring letters just have the substance put into the partnership agreements.
What are LPs' views on the facilities?
JJ: I can probably count on one hand the number of LPs that I know of that for one reason or another are anti-subscription facilities. I can probably name 10 times as many LPs that Wells Fargo has a direct relationship with and are referring business to us. Often when they're investing in a new fund, they tell the manager “we want to have a subscription facility, you should talk to Wells Fargo”.
There's a massive market in single managed accounts where the LPs are requiring, as part of their investment thesis, to have a subscription facility and that's usually our direct interaction with the LP community.
Clearly there's a large contingent in the LP community that's very pro-subscription facilities just by the level of single account requests that we're getting for financing.