Secondaries Investor this week published the first of a series of articles titled “Leverage in the time of Covid-19: Fund level facilities.” The article examines how secondaries funds use subscription facilities and fund level leverage, discussing the positive credit performance of subscription facilities, the potential implications if there is a large drop in portfolio value, and the use of NAV lines for early distributions and dividend recaps.
In a Private Funds CFO article, private equity CFOs discuss the ILPA’s draft recommendations for disclosure on funds’ use of subscription facilities. Generally, the private equity CFOs are supportive of such recommendations; however, debate remains around the calculation of two IRRs – one that includes the impact of leverage and one without. A goal for ILPA in providing an IRR without the effect of a subscription facility is to more accurately compare manager performance.
Samir Kaji, Senior Managing Director and Innovation Sector Strategy Lead at First Republic Bank, this week published an article on LinkedIn titled “Use of capital call lines for emerging managers during economic downturns.” The article sets forth the typical uses for which an emerging VC manager might deploy a capital call line and what terms an emerging manager could expect in this environment.
Private Funds CFO published an article this week titled “GPs look for longer sub line duration during fundraising.” The article focuses on how using a subscription facility for investments made between the initial investor closing and the final investor closing benefits both funds and investors by avoiding the need for true ups, but can often conflict with a fund’s clean down requirement.
Here's a look at what we're reading outside the four corners of fund finance.
Given recent market volatility, we are seeing some funds in the hardest hit sectors start to pivot and employ capital reduction measures or a change in investment strategy to weather the crisis. We are seeing this firsthand in the form of LPA amendments and requested consents as subscription facility lenders are required to review and approve material LPA amendments. This, of course, includes any change that has the effect of reducing or delaying the calling of investor uncalled capital.
While not everyone may be familiar with (or lived through) Black Monday, the Savings & Loan Crisis, the Dot-Com Bubble or the Great Recession, it is impossible that anyone reading this note could be unaware of the COVID-19 pandemic and its impact on their social and economic lives. While I have lived through more of the above events than I care to admit, for business lawyers, times like this cause three words to invariably rise from simple words on the page to real topics of conversation, analysis and angst. Those three words are “Material Adverse Effect.” A full analysis of the concept, what it is (and perhaps, more importantly, what it is not), and how and when it can be successfully applied is well beyond the scope of this note. Nevertheless, an overview of the use of the MAE concept in acquisition and loan transactions, a discussion of recent developments and a brief roadmap for analysis hopefully is an achievable objective.
Sarah Elliott of National Australia Bank connects with Cadwalader’s Mike Mascia in this week’s podcast edition of Fund Finance Friday: Industry Conversations. In the podcast, Sarah gives an update of what National Australia Bank is seeing in the fund finance markets. She also discusses her recent LinkedIn post on the human tragedy surrounding us all from the COVID-19 virus, along with the great hope, resilience and leadership she sees emerging from the difficult circumstances.
Our team was supposed to have an offsite on Wednesday of this week. I was looking forward to going to the Wells Fargo PGA Championship Thursday with friends. My wife had concert tickets for tonight. And I had plans to take my dad and dad-in-law fishing today. Despite none of that happening, the last week of April was incredibly active for most all of us. Below is a short update on my recent observations from our markets along with some other gratuitous commentary as we enter May 2020.
PEI this week published an article looking into the Los Angeles City Employees’ Retirement System capital call liquidity management. Per the article, LACERS is doing great.