Side Letter: Fund leverage amid covid-19, sub line sticking point, state aid stoppers

Our reporters and editors have been thinking a lot about how the proliferation of fund-level finance will play out in this crisis. Here’s today's brief, for our valued subscribers only.

Just happened

Fund-level leverage

Susbscribers to sister title Secondaries Investor are being treated to a series asking how leverage used by secondaries funds – which comes in multiple forms and layers – will react to the covid-19 crisis. Takeaways from the first instalment on fund-level facilities will resonate with GPs and LPs across private markets. Courtesy of Rod James:

LPs are well placed to remedy any problems in relation to subscription lines. But the way these lines interact with more exotic forms of financing, such as NAV-based lending or distribution recap facilities, is difficult to predict. The latter of these have allowed certain firms to borrow a large chunk of the following year’s anticipated distributions. “These facilities work 99 percent of the time because it’s really hard to get your projected distributions number wrong by 40 or 50 percent,” said one secondaries veteran. In a black swan situation, like a global health pandemic, such a miscalculation is perfectly possible.

Rod’s take: “A combination of multiple lending facilities could have a material impact on a fund, and if a secondaries fund receives a high volume of capital calls at once from its underlying GPs wanting to pay down their own credit lines early, it could end up with less uncalled capital to plug holes elsewhere.”

Sub line alignment

The use of subscription credit facilities has not debated much these days (am I right?). There is still variation among managers as to how they are used, but there is agreement that LPs should know how and why they are being employed.

Graham Bippart over on sister title Private Funds CFO might have identified the last remaining alignment issue to be ironed out: whether the 2017 ILPA guidance that facilities should not be left outstanding for longer than 180 days should also apply to the fundraising period (which in this day and age will often be longer than 180 days). This matters, because putting early deals (done before a fund’s final close) on credit means there is no messy “true up” process, in which earlybird LPs who funded those deals need to have their holdings equalised with the latecomers. The process is surmountable, but is made entirely unnecessary if a credit facility can be used.

Graham’s take: “If more GPs do seek the ability to keep their lines outstanding for the length of the fundraising period, it won’t likely sit well with the ILPA, which is concerned about the ability of leverage to distort IRRs, especially in the first two years of a fund’s life.”

Private Funds CFO subscribers can read the full article here.

They said it

“Diverting any federal assistance from small businesses, especially those in more vulnerable and socio-economic disadvantaged communities, to line the pockets of private equity is unacceptable.”

A letter from 17 Latino members of US congress to the Treasury and Small Business Association illustrates the perception challenge facing private equity portfolio companies over access to state aid amid the covid-19 crisis.


Getting state help. Anyone looking for a rundown of the industry’s efforts to access state aid for its portfolio should read this article in the New York Times.

Protectionism rising. PEI‘s Carmela Mendoza has pieced together an interactive guide to how EU countries are implementing measures to prevent foreign takeovers of strategically important assets amid the pandemic.

Dig deeper

Institution: International Finance Corporation
Headquarters: Washington DC, United States
AUM: $54.73bn
Allocation to alternatives: 21.46%
Bitesize: $10m-$50m

International Finance Corporation has committed $50 million to Turkven’s Turkey Growth Fund IV. The fund will invest in mid-market growth capital and buyout transactions in Turkey.

For more information on IFC, as well as more than 5,900 other institutions, check out the PEI database.

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Today’s letter was prepared by Toby MitchenallIsobel MarkhamAdam LeRod JamesRobin Blumenthal and Alex Lynn.

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