Through our close-knit relationships across our firm our full range of expertise is at your fingertips. Helping you deliver first class service to your clients across their personal and business worlds. Jenny Sargeant, partner lead of our specialist private banking team sits down with fund finance partner Ed Fuller.
In a nutshell what’s your area of expertise?
I am a general debt finance partner with a specialisation in fund finance and lending to regulated financial institutions. I started working on fund financings when I was at Dundas & Wilson (who were acquired by CMS) which was near the start of the fund finance market launching. RBS and Lloyds originally were the main lender
participants in the UK market, and I worked on a large number of transactions for RBS in particular on larger syndicated deals of between £30m and around £500m. Historically the lending market has been dominated by banks, but now insurance companies and other financial services businesses are starting to enter the market.
Synthetic Risk Transfers (SRTs) and similar derivative products are also now being used to reduce banks’ exposure to the sector, which is prompting insurers, debt funds and other alternative capital providers to enter the market. We are expecting further fragmentation and growth of the sector.
To the uninitiated, what is fund financing and what are the main types of financing?
Fund financing is financing tailored to the needs of investment funds at different stages of their lifecycle. The main stages are:
Fundraising / investment period: a fund in fundraising mode or early deployment stage has lots of investor commitments but no assets. Here you get subscription credit facilities which are facilities secured on the uncalled capital of the investors. This helps manage execution risk for funds, as well as their IRR, and works like a bridge to receipt of LP capital. A fund can submit a utilisation request to its bank to finance an asset acquisition and then have a fixed date in the future to line up the draw down
request from investors rather than having to line up a c.15 business day drawdown period for investors with completion of an investment which is often far from easy to do.
Value creation / harvesting: the fund has assets, but fewer investor commitments and so collateral packages for fund financings at this stage will look to the value of the investment portfolio rather than the residual LP commitments. At this point we see NAV lending which is where the fund leverages against the portfolio assets. They might do this for a variety of purposes, such as to make distributions to investors who want some of their money back, for making bolt-on acquisitions in connection with the existing portfolio or for spending on opex in the existing asset base, by way of example. The loan values range depending on the fund size and go up to very large ticket sizes.
GP facility: this is where a fund manager is asked to put their own money into the fund so they have ‘skin in the game’ and may need to borrow in order to fund that commitment. The GP in this instance is borrowing against future cashflows from management fees, GP coinvestment commitment and/or carried interest. These can be smaller facilities from £5-10m, and we have seen a number of private banks look to get into this space as the deals are similar to other lending transactions that their private capital clients get involved in rather than large corporate loans. To make the subscription credit facilities work you typically need larger numbers (which is why they are starting to be packaged up and on-sold). The margins are not huge, but they are often key to developing relationships with fund managers. Margins are typically higher for NAV lending.
When do you come across private banks or their clients in your practice?
In a few places, sometimes the fund finance desks sit within the private banks and in others there will be individual fund managers looking to leverage their position in
funds and overlap with the private wealth side of private banks. We also advise private banks structuring transactions for private equity clients assessing carried interest and how to best utilise that as part of a client’s wealth and assets.
Can you give an example of where you best add value?
When you are looking at a fund finance transaction it is a complex process where a large volume of information needs to be reviewed and assessed in order to agree
appropriate funding structures for each specific fund. The work spans reviewing the underlying fund documents with investors, to assessing the security package and
regulatory and tax advice and then bringing this all together. We tailor a package including appropriate safeguards and operational requirements, and it is taking all this
information and producing the big picture for clients. There is always tailoring needed for each transaction. Although the concepts behind subscription credit and NAV lending are similar, there will be nuances for each fund and then always different jurisdictional impacts. The individual aspects of fund documents come from the
different reward elements to each fund which are often unique.
Do you have a mantra or saying that best describes how you work?
The fund finance industry as a whole is entirely driven by service and the types of borrowers are high powered private equity UHNWs, and the banks are under a great
deal of pressure to provide as slick of a service as possible. My job is to make the bank look good. You say jump, I say how high?
What do you enjoy most about what you do?
I have always loved fund finance because of the diversity and the intellectual challenge of condensing thousands of pages of funds documents into a viable credit and
security package. I also enjoy being curious about why people are doing things in slightly different ways and how the market is developing. I take intellectual pleasure from being part of something that is highly complex and intricately engineered.
What do you think is key to assisting UHNW families in your area of expertise?
Service is key for fund managers executing their fund strategy, so expectations are high and delivery is key. Fund document packages are long and complicated but fund managers want concise advice about how to structure a transaction and what is the most efficient manner for them to borrow in. They want strategies distilled to practical advice and with a transactional plan and of course delivered on time. They have a lot going on in their lives and they want their advisors to sort things out and deliver solutions.
How can we best bring together “business” and “personal” requirements for our private clients to deliver first class service for them?
On the GP loan side when it is the fund managers’ own money, that is when there is a more personal connection for the individual fund managers, who are likely to require personal tax advice to be knitted together with the financing and the impact is relevant to their personal financial planning. There will be personal as well as business drivers and they want their advisors to be connected across their worlds.
How do you help private banks deliver first class service to their clients?
Speed of delivery and being user friendly. GP loans are often people’s own money so there are real human implications and although the lender will want robust collateral protections flexibility will be needed to ensure individuals can get comfortable with their exposure. Remembering the wider client relationship is important. I used to do a lot of work with certain private banks and it’s important to remain cognisant of the fact that the loan you are doing with them might not be the biggest piece of business between the borrower and that private bank given the wider wealth management relationship.
What are the opportunities for private banks within the growth cycle of fund finance?
We are seeing more and more individuals looking to leverage assets in funds which are often illiquid assets, such as their carry or GP commit entitlement. So where private banks can compute the value of those funds and ascribe a collateral value to them it can be very attractive for HNW and UHNWs in terms of keeping all of their service needs with their private bank. It is an opportunity to enhance the wider relationship.
What would be the “one thing to watch out for” coming ahead in your area?
Fund finance is a growth market and we expect to see continued rapid growth. It is fairly recession-proof and sectoragnostic. NAV lending as a concept has exploded as it offers a solution where there are issues with asset values at the point of a fund exit. The market is also widening with GP facilities no longer needing to be over high minimum lending levels with banks being prepared to lend on smaller facilities even where they have no prior relationship with the fund. It can be a way of building a relationship with the UBO behind a fund for private banks. As the market grows, we are seeing increasing opportunities for private banks. A linked trend is a continued
increase in wealth generation through the funds market, so more and more of private banks' clients will have funds businesses creating a need for private banks to understand the drivers for fund business and fund managers.
Our connections across our firm are here to provide you with all the expertise you need so if you want to continue any of these conversations or have any fund finance queries, please feel free to get in touch with Ed.
For more information about fund finance, please visit our website here.
For any Private Banking related queries please contact Jenny Sargeant.
