Side Letter: CVC’s €22bn, five forces shaping fund finance, Exponent pref play

We are taking a close look at forces acting on the fund finance market today. The bad news is: your next credit facility will probably cost more than your last one. Here's today's brief, for our valued subscribers only. 

They said it

“Of course, not every private equity investment in retail ends in tears and there are many successful relationships.”

The Australian Financial Review adds balance to a report on private equity-backed retail collapses in the country, the latest being swimwear brand Seafolly.

Just happened

CVC’s mega-raise

CVC Capital Partners has held the final close on its eighth flagship private equity fund after around six months on the road. The buyout titan raised €21.25 billion in LP commitments in a final close on Friday, according to a source familiar with the fundraise. Bloomberg (paywall) reported the news on Friday. A GP commitment of more than 3 percent brings the fund’s total to more than €22 billion. On an annual average exchange rate, this makes CVC VIII the second-biggest fund ever in US dollars, as the chart below shows.

Sub lines are getting more expensive


Over on sister title Private Funds CFO, editor Graham Bippart has been looking deep (perhaps deeper than anyone ever has) into the provision of fund finance. This market is both opaque and vitally important to PE firms. Against the backdrop of the pandemic, it is undergoing a number of changes. Here are five of them:

One: Amid the crisis, banks have focused on existing clients at the expense of new ones, with even blue-chip managers being rebuffed. Sources noted “banks traditionally seen as smaller players, passive participants, or servicing specific market segments, as showing up on deals they might not have been able to compete for previously”, writes Bippart. He singled out Silicon Valley Bank (especially in Europe, according to one source), First Republic and Signature – which last year hired two managing directors from Wells Fargo’s sub line business. Signature MD Charlie Owens noted in June that dealflow for had “at least doubled” in recent months.

Two: The result of constrained supply? More lender-friendly terms. Says Bippart: “Pricing for syndicated subscription facilities, in which one or a few banks take the lead on a loan and others participate passively, for top sponsors rose from pre-pandemic levels of around LIBOR plus 150-180 basis points to as much as 225bps. By July, one US lender says levels could go to 250bps for top sponsors, depending on the size of the deal and other considerations. In bilateral deals, which tend to get tighter pricing, since banks don’t have to shop them to other lenders that may have higher rate thresholds, some say top sponsors can achieve as low as LIBOR plus 185bps.” Initial tenors have become as short as one year and significant LIBOR floors are being used.

Three: Credit concerns are creeping in for lenders, but there is no wave of defaults yet. “Clearly some of your borrowers aren’t in as strong a financial position as they were earlier in the year, and that ripples through to the underlying investors,” says Wells Fargo’s Jeff Johnston, a lender. Members of the Fund Finance Association in May noted only one institutional investor default on a capital call up to that point. Nonetheless, lenders are increasingly inserting NAV covenants and minimum called capital requirements into credit agreements, and even looking beyond uncalled LP capital for potential sources of repayment.

Four: It’s become harder to find a syndicate for new, large transactions. And some banks are trying to sell down existing pre-covid exposures, in some cases to make room for new loans at new, higher prices. It isn’t clear how smoothly these sales are running.

Five: The market for fund finance – at an estimated $500 billion – may not be big enough to account for increasing demand. The future may well see more participation by insurance companies, as well as other non-bank lenders, and a greater role for syndication.

Subscribers to Private Funds CFO can read the investigation in full here. PEI subscribers will get the full report later this month.


Preferring pref
More evidence that preferred equity is filling the gap at a time when much of the secondaries market appears to be on pause: the UK’s Exponent Private Equity has taken on up to £125 million ($156 million; €138 million) in preferred equity financing for its Fund III to make add-on acquisitions, sister title Secondaries Investor reports. The move comes 18 months after the mid-market buyout firm shelved plans to offer LPs in the £1 billion vehicle the chance to cash out.

Rising demand for transparency
Transparency remains top of the agenda for LPs and GPs amid the pandemic with LPs demanding more granular levels of reporting and portfolio insight, according to research from Intertrust. Over half of managers expect LPs to call for improved disclosure on fee structures, risk exposures (55 percent) and expense allocations (48 percent).

What you’re reading

Here’s what subscribers spent most time with last week on PEI:

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

8 July

9 July

Today’s letter was prepared by Toby Mitchenall, Adam Le and Carmela Mendoza.

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