Banks pile into fund financing

More banks are joining the booming fund finance market as private equity firms raise larger and larger funds and need bigger subscription facilities.

This week, New York-based commercial bank Signature Bank launched a fund banking division. The new division will offer subscription lines of credit, management company lines of credit and general partner loans specifically targeted to private equity firms and their general partners, according to a statement from Signature Bank. Heading the unit is Tom Byrne, the bank’s managing group director and a former group head of Silicon Valley Bank’s global fund banking division. For Signature Bank, the move is part of its objective to serve as a single point of contact for private equity firms.

In July, Aberdeen Standard Investments teamed up with UK insurer Phoenix Group to offer early-stage fund financing to private fund managers. Phoenix Group has put up £500 million ($657.4 million; €565 million) from a series of liquidity- and short-duration funds.

Asset servicing bank CACEIS estimates that the global fund finance market stands at about $400 billion in outstanding subscription lines of credit, with the UK as one of the most active markets, after the US.

At a fund finance panel at the British Private Equity and Venture Capital Association Summit last week, Ahlem Ben Gueblia, director of private equity funds solutions for Credit Agricole CIB, pointed out that subscription lines of credit are today a tool recognized everywhere in the GP and LP world.

“Although it is a product used by the big private equity funds a few years ago, it is also used today by mid-market and smaller players,” she said. “Because it is growing in demand, more banks are interested in providing fund financing. As a result, there have been more varied deal structures with certain standardization of documentation. A lot of US and Asian banks are also coming to the market.”

Along with newer deal structures, umbrella facilities – which cover many funds for the same manager – and longer terms, which provide more security and flexibility for the manager, have become more commonplace.

Daniel Stengel, general counsel at investment advisor Tyndaris Real Estate, noted in the panel that fund financing options give “peace of mind on the deal side” and allow more flexibility in terms of timing and structuring of the deal. “For the LPs, it’s a much more comfortable situation since they can plan better with us when we actually need the capital.”

Ben Gueblia added that the biggest advantage is that the administrative burden is lessened. “There is more predictability of cashflow for the investors, it allows GPs to complete the acquisition very quickly and it also does improve the internal rate of return.”

“If you look around the market now it’s quite hard to find a bank or lender that is not involved in the market,” noted Jeremy Cross, a partner at law firm Cadwalader. “The market has hugely expanded for many reasons, and that has been to the benefit of the private equity industry and the banks who lend into that.”

In what is believed to be the only example of a subscription credit line going into default, limited partners of Abraaj Group have been urged by liquidators to cover payments related to a defaulted facility provided by Barclays Bank, and may be on the hook for another provided by Société Générale, according to a report prepared by joint provisional liquidator Deloitte.