Investors are becoming discerning and sophisticated in assessing managers’ use of financing tools across their businesses, according to panellist speaking at the Fund Finance Association’s latest event.
LPs are pushing back less on GPs’ use of financing options across their funds and portfolios amid more conversations and better understanding around the tools, a law firm partner said at the FFA’s European Fund Finance Symposium in London on Thursday.
The event was held under Chatham House Rule.
“LPs know what they’re asking of GPs in terms of the team commitment, and they’ve got visibility in the first question they’re asking on fundraising, and track record [and] return of capital,” the partner said. “I think LPs are just becoming more sophisticated in terms of asking the right question and having that discussion… They need to know how the house works.”
This is evident particularly in the smaller and mid-end of the market, especially if the LPs are funding some of the co-investment and team commitment through a waiver of management fees, the partner said. LPs want to be aware of their GPs’ succession planning, for example, and not solely deploy money.
With elongated periods in terms of holding asserts and potentially raising the next fund, GPs are generally thinking hard about what they can change in the limited partner agreement, according to the partner. “We’re all updating LPAs at this point because somehow old vintages [were] silent on it.”
The partner also pointed out that this move is “a part of the industry’s evolution and needing to tackle GP financing in a transparent way”.
Older limited partnership agreements required consent on the use of fund finance products, while some newer funds no longer have this, said another fund finance practitioner at the event.
“Some of these points are now being covered on day one when you’re negotiating your LPA with your LPs. It does mean that these deals are getting easier to put together because you don’t then have to necessarily go and get consent.”
GPs need to get the right balance between fiduciary duty to their LPs and the need to have transparency, said another panellist.
“You can’t really go into deals if you definitely need to disclose. It just depends on what the structuring looks like and how far up the structure the debt’s taken and also the specifics of the particular fund documents.” The partner added that lenders will have certain considerations around security, cashflow and repayment.
The global fund finance market has grown from beyond simply bridging capital calls and has become a more sophisticated tool for managing liquidity. Ares Management estimates that the global fund finance market stood at $1.2 trillion last year and expects it to grow to more than $2.5 trillion by 2030, according to a white paper.
The relationship between GPs and LPs is becoming even more critical, particularly against a backdrop of increased NAV financing. The use of NAV facilities by PE firms in particular remains controversial within the LP community and full transparency between GPs and LPs on the uses and conditions of such financing is highly recommended – meaning that trust and communication between GPs and LPs is vital.
