BVCA summit: fund financing boom necessitates tailoring

The coronavirus crisis has encouraged an already growing interest in fund financing services, with major GPs turning to preferred equity and NAV-based finance facilities for emergency liquidity, Unquote reported in April.

Tom Rotherham-Winqvist, a managing director at Wafra, spoke of the growing trend on a panel at BVCA's recent online summit: "There's been general acceptance of the tool, and bigger players are making use of it. Anything that's going to create value and provide a reasonable price of leverage is generally going to be a good thing."

One notable example is 17Capital's £125m preferred equity facility for Exponent Private Equity Partners III, agreed in July 2020.

Rotherham-Winqvist continued: "You've got a real diversity of LPs with different interests, liquidity profiles and demands, and this is all wedged into a pretty homogenous fund structure. You need to solve that disconnect to achieve heterogeneity."

Roberto Biondi, global head of financing and partner at Permira, said the firm had been considering some of these facilities, but had decided against it: "Our LPs were pushing for co-investment opportunities. In addition, we've moved on to a faster fundraising cycle, so we always have the ability to raise. Finally, we feel we would need to have full disclosure and transparency with LPs, and that seems to be an additional burden for both sides of the table."

Rotherham-Winqvist also noted the extra burden for communication, negotiation and discussion with regard to these facilities: "It is a complex asset class and, depending on the LP, many don't have lots of human resources, so adding complexity is a challenge. It's a question of adding an additional layer that requires transparency, clarity and communication with LPs."

Katie McMenamin, a partner at Travers Smith, noted the importance of tailoring when it comes to choosing facilities: "It has become much more customary to think about how GPs use these tools. This will become more mainstream, and the ones that execute on these facilities will be situations where it fits with the story, both for the provider and the manager, where they're confident that this is the right way to solve the problem."

Permira's Biondi spoke about control over the assets involved: "The ability to choose the moment to exit companies is paramount in our work and fund financing has triggers that could force you to begin exiting assets. Our initial reaction was that that was something we wouldn't do."

Moderator Owen James, an investment director at 17Capital, said that premature exiting was not an issue with preferred equity, but mainly with NAV-based facilities, and that there was quite a lot of breathing space with these provisions.

McMenamin agreed: "It has been a massive sticking point, but contracts have been written to ameliorate these issues. NAV-based financing providers have offered stand-still periods, consultation periods and provisions mandating discussions on how to deal with breaches, before the security has been triggered."

While some market participants are concerned about the use of proceeds of a NAV-based facility, Wafra's Rotherham-Winqvist said he had yet to see a situation where the use of proceeds was not reasonable: "The challenge is, it is on a case-by-case basis, and you have to look carefully at each situation. If equity positions are being subordinated, that is something to be considered. You must ask if there is equal impact on the LP and GP, as well as the costs behind carry. Is there a further effect on the value of the IRR number? We're not against using these facilities, but LPs should have choice."

Inflating IRR numbers has been a hotly contested issue that expands beyond fund financing. Biondi said: "In the use of proceeds of NAV-based financing, the one we would consider the worst is to manage IRR, or even carry distribution. That would go against what we have done in our history. It is an interesting element of IRR losing its meaning, but LPs are now very happy to strip out all IRR-enhancing tactics. We think that's a good way to look at it for fundraising."

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• Topics
• GPs
• Financing
• LPs
• UK / Ireland
• United Kingdom
• Travers Smith
• Permira
• 17Capital
• Fund financing