Investec’s Helen Griffiths and Oliver Bartholomew [pictured], discuss key structural developments for capital call facilities, including cost savings awarded by the master facility agreement, the importance of GP credit ratings, and continuation vehicle solutions.

With capital call facilities now understood to be at 98 per cent of market coverage, these products have largely harmonised in terms of fees and margins applied. Where traditional banks can offer a level of differentiation is on the ancillary products offered alongside subscription lines, such as fund administration services, custodian or FX offerings.

However, Investec has found a unique point of differentiation in how these loans are structured - through its master facility agreement (MFA). “Where there isn’t a lot of differential for subscription lines with regards to the margins on these products, we are providing a differential on the fee scheme. That can make a huge difference for funds; depending on the speed at which they’re deploying, it allows GPs to be able to commit facilities within a master framework as and when they need to as opposed to having it all the time,” explains Helen Griffiths, head of structuring in Investec’s fund solutions team. “We also provide flexibility to have part of the framework as a committed RCF, to provide for the settlement of management fees or bridging of co-investment and/or portfolio leverage.”

Investec’s MFA is the wider agreement the bank holds with its clients, which allows for the capital call facility to be tailored in terms of both cost and tenor. According to Oliver Bartholomew of Investec’s fund solutions team, whereas traditional structures for capital call facilities come with fixed tenors and costs, “Our MFA allows for flexibility over tenors, which can be tailored by the GP. For example, if the tenor is three months, they only pay for three months. Ultimately, it’s a cost saving initiative.”

Hold me closer

On top of the flexibility offered by the MFA, the loan can also be structured as a holdco, rather than a fund, which hasn’t traditionally been available for these facilities.

“There are other ancillary benefits,” says Bartholomew. “Derivative products, which don’t require cash collateralization, are a major benefit, especially for private debt funds for hedging products. And ultimate flexibility for acquiring multi currency assets, which is another cost saving opportunity.”

“It allows you to draw under single currency and do an FX swap behind the scenes, without the need to post additional collateral. Post LIBOR, where the market is in flux as to how currencies will trade, this approach allows for simplification; for funds to borrow in one single currency and then swap if needs be,” explains Griffiths. The potential for cost efficiencies are so great, that according to Bartholomew, one client has not paid for anything because they didn’t draw the facility. “The cost saving there was around £1.5m.”

Investment grade

With last year’s IPO of Bridgepoint and Petershill, investment grade GP solutions have arrived. Griffiths expects to see this trend develop into the mid-market in Europe, which would allow those GPs to use facilities that have typically only been available to larger, bluechip houses.

This is important because: “Credit ratings can lead to a simplification of the recourse structure, providing third party validation of the value of a manager across multiple funds and strategies,” explains Griffiths.

“That rating allows for the ability to syndicate into the institutional market, where ratings are key,” she adds. This is a big deal. With GP co-investments typically demanding complex structures, lenders need an understanding of payments and cash flows where they’re not able to attribute recourse to LPs as they would with a subscription line. “Creating a verifiable investment grade financing helps connect the dots; it opens up the institutional investor market to the world of GP financing because. All they need is the expertise and economic alignment that a lender like Investec can offer,” says Griffiths.

Continuation nation

On top of efficiency gains for the way in which capital call facilities are structured via the MFA, as well as the arrival of investment grade GP solutions, another important and recent development in this space is bridge loans for continuation vehicles.

As GP-led restructuring continues to move into the mainstream, the past 12 months especially has seen an uptick in the use of continuation vehicles for those managers wanting to hold on to top performing assets for longer. “From a lending perspective, helping new funds to bridge commitments into a new vehicle is different to a typical sub line because the continuation fund has assets from day one,” explains Bartholomew.

Indeed, the total visibility on a continuation vehicle’s assets makes it a very different animal to a blind pool fund, which allows for fund finance products to be taken out for longer. Longer tenors are also supported by the removal of the previous fund’s LPA and sometimes the arrival of new LPs. “The longer dated facility is repaid via both capital calls and exits,” adds Bartholomew.

Investec has already executed bridging loans for continuation vehicles and expects to do more over the coming year as more GPs roll assets into new funds. Clearly, the pace of innovation is accelerating within the fund finance market. According to Bartholomew, this is a result of the market’s exponential growth over the last two or three years, spurred on by new entrants and larger funds raised.