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16 Sep 2021

A balance sheet race

Matt Hansford

Investec Fund Solutions

General partners (GPs) have never been more hungry for liquidity. Is this a need for defensive capital to protect against the after-effects of Covid? 

Not a chance! Growth, growth and more growth is at the forefront of GPs minds. GPs are coming out of the blocks fast. Responding to our 2021 GP Trends survey, 28% said that as a result of COVID they would increase their fund size and 80% said they would be making follow on or bolt-on investments in their portfolio.

GPs are beginning to diversify by adding new strategies, raising more funds and holding assets for longer. GP-led continuation vehicles which enable a GP to drive more value in investments are also on the rise. This is despite the requirement of GP commitments and carry to enable said continuation vehicles. All in all, the opportunity is now and they don't want to fall behind the leading pack.

However, for a GP to consolidate its position leading the race, one crucial tool is needed. That’s liquidity and lots of it. Globally, GPs are committing more than ever. Our 11th GP Trends survey showed commitments at 4.8%, up from 2.9% in 2019 and 3.7% in 2020. This continues to be against a backdrop of succession, given the age of the industry: that same 2021 GP Trends survey also found that 24% of respondents were considering retiring if they were to leave their current jobs.

To counter this, GPs are building balance sheets fast. Meanwhile, equity options continue to develop. More and more are joining the club of GP stake sellers, with CVC reported to be considering this route. Dyal has merged with Owl Rock to create the Blue Owl SPAC to set itself up to capitalise on the trend.  Bridgepoint’s IPO on LSE this summer was well received by investors and the stock soared.

Matt Hansford
Matt Hansford, Investec Fund Solutions

While equity options abound, debt liquidity has not kept up. There has been little development from the banking community and so this space undeservedly continues to be misunderstood, leading good GPs to fund their business and growth 100% with equity.

While equity options abound, debt liquidity has not kept up. There has been little development from the banking community and so this space undeservedly continues to be misunderstood, leading good GPs to fund their business and growth 100% with equity. Not an optimum capital stack.

So, what are the debt options?

1. Management fee streams provide a great annuity cash flow from which to craft a lending solution. Paid by high-quality Limited partners (LPs), term lending can be structured against these cashflows.

2. GP asset value NAV Financing - this can be in a new fund or old GP commitments that have matured in value but are naturally illiquid. Value can also be unlocked from carry, but this does take a specialised, experienced lender to understand the value, waterfall and legal structuring.

3. Private banking - specialist private banking that recognises the value in partner distributions, carry and GP commitments can unlock liquidity at a personal level.

4. A mix of the above! - a sensitively integrated solution is often required to achieve the financing to match the big opportunity.

Whether it’s a NAV deal structured against GP assets, a long-term cashflow lend against management fee profits or a bespoke personal solution for a managing partner, GPs have a rich seam of value that can be unlocked.

While GP equity stake investment is a specialist business, so is GP financing and a lender will need a combination of experience, creativity, sharp legal structuring and a long term partnership approach.

GPs are faced with a golden opportunity but – much like sprinters needing “super spikes” to bring home a medal – they will need to add credit financing to their kitbag.

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Matt Hansford

Fund Solutions

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