This article appears as part of the Fund Finance special in the February issue of Private Equity International. Find more here.
A fund finance fund
Low returns and the revolving nature of subscription lines meant credit shops traditionally steered away from fund finance.
However, the huge increase in demand from private equity sponsors has forced many to think twice. Crestline Investors, the Fort Worth, Texas-based alternative investment firm, has been providing fund finance solutions for private equity firms since late 2016.
In November 2018, the firm closed on a fund finance vehicle of more than $600 million.
The group sits between private credit, private equity and secondaries, extending expensive but less restrictive credit. “We tend to be much more flexible, we tend to be faster, we tend to deal with more esoteric assets than most banks would be comfortable with,” says Dave Philipp, managing director and senior portfolio manager of the Fund Liquidity Solutions Group.
There has also been talk of preferred equity players such as London-based 17Capital stepping into the space. In September 2018, the firm hired partner Tom Doyle. He led the creation of JP Morgan’s private equity fund financing business, sister publication Secondaries Investor reported at the time.
ESG credit line
In October, Dutch banking group ING revealed what it believes to be the world’s first capital call facility with an interest rate linked to ESG performance.
The loans will operate as an incentive system, slashing interest rates if sustainability targets are met and carrying penalties if not.
Its first such deal was a $65 million three-year revolving facility for Quadria Capital Fund II, managed by Singaporean healthcare investor Quadria Capital, which is targeting $500 million and was set to close at the end of 2019. “This type of facility is just an overlay on what is a subscription credit facility in order to encourage ESG-improvement and responsible investment,” Fi Dinh, a director at ING, told PEI last October.
In January, Eurazeo announced it had increased the size of its credit line by 50 percent to €1.5 billion. The credit line is indexed against ESG criteria. If these criteria are fulfilled, Eurazeo will get savings on fees which it will funnel into projects to reduce greenhouse gas emissions. If not, the additional fees the banks would be entitled to charge Eurazeo would also go towards sustainable causes.
NAV-backed and hybrid finance
Traditionally, the recourse of the lender was to a fund’s uncalled commitments.
Increasingly, the focus has drifted. “They are not secured against the investors’ potential commitments, but rather against the funds’ underlying cashflows and distributions, resulting from underlying portfolio investments,” wrote Leon Stephenson of Reed Smith in Private Equity International in 2018.
Asset-backed financing brings several benefits. It is inherently longer term, beneficial for funds that, for whatever reason, have to hold on to assets for longer. For a private equity fund that needs liquidity at fund level but has no liquidity events on the horizon, such credit lines could also provide a much-needed lifeline. Recent years have seen growth in the number of hybrid facilities, which are secured by unfunded commitments and the fund’s underlying investments.
“They can be useful for more complex situations, including those funds which have non-standard structures, or which have some open-ended characteristics,” Citco’s Michael Peterson told sister publication Private Funds CFO. “We view hybrid facilities as one more tool that a smart fund manager can employ to better serve its LPs and optimise its funds’ capital structures.”