What does the future hold for General Partners financing?

What is a GP facility?

The term ‘GP facility’ broadly refers to any lending to fund managers/general partners (GPs). These facilities are put in place to solve challenges faced by GPs, including providing liquidity for new fund commitments, succession planning for the fund’s management, or raising finance to seed new strategies. At Investec, we can help you free up the capital to overcome these challenges.

Our GP facilities are structured to the requirements of each manager, with the structures leveraging the cashflow generated by the manager and the GP’s commitment itself. The most common use for GP facilities is to help GPs meet their financial obligations to the funds they manage. This commitment shows they are aligned with all the investors in the fund.

GP facilities provide a non-dilutive financing alternative and a source of liquidity for fund managers to service their obligations. As funds grow and raise more investment, lenders will look at the credit worthiness of the manager and the reliability of management-fee income because both factors underpin the professionalism of the GP and manager.

How is a GP facility structured?

A GP facility is typically structured as a corporate-style loan that benefits the GP (where the borrower can include other entities in the management stack) as a corporate entity instead of providing financing to each individual working with the fund manager. This structure provides a longer-term financing solution that can be tailored to reflect the requirements of each GP.

GP facilities typically include the following terms:

Debt sizing: The size of the facility is determined by analysing stable cashflows generated by management fees and the lumpy cashflow from portfolio exits/distributions, as well as looking at the value of the GP commitment.

Facility structure: Each facility will have a specific drawdown and repayment profile that matches cashflows from forecast liquidity events. Multi-draw term loans allow for staggered drawdowns to match the deployment of the fund, with repayments usually coming from exits or distributions from the underlying portfolio. Repayment profiles and tenor extensions can be baked into the facility on day 1 based on future fundraising targets.

Security: The security package is flexible and tailored to the GP, and it usually includes security over the bank accounts, assignment of the GP’s priority profit share paid from the fund to the GP, and security over the GP’s commitment. Collateral from multiple funds can be incorporated into the structure.

Why are GP facilities relevant in 2023?

In Investec’s 2022 Private Equity Trends Report, we interviewed more than 150 senior private equity professionals to understand PE sentiment and future industry trends. Based on GPs’ feedback, we discovered that challenging macroeconomic drivers – especially high inflation and rising interest rates – had them questioning how fundraising would evolve over the next 12 months.

Despite this uncertainty, the market view is that there will still be demand for high-quality managers with strong deal pipelines. Nearly half (46%) of those surveyed expected their next funds to exceed their predecessors by 25-50%, so, where fundraising is successful, GPs will have to commit more than ever.

The market may be tough but the survey suggests that the industry is well-capitalised and prepared to navigate any dislocation, and LPs will still want to make allocations to good managers. Despite the underlying uncertainty, many respondents are expecting to deploy more capital over the next 12 months and those firms with capital available will continue to look for opportunities, although PE firms could be highly selective and cautious around valuations.

Economic uncertainty has the potential to push out portfolio exits, so carry pay-out proceeds and distributions used to finance GP commitments could be delayed. This presents a challenge for GPs, as commitments into new funds will probably be required before investments from previous funds are fully realised. Investec’s GP facilities can provide this liquidity to allow commitments to be made prior to the managers’ proceeds being received.

What does the future hold?

In the last few years, succession planning has emerged as a factor in investing in GPs’ stakes, especially as executives approach retirement age. As the PE landscape evolves, and firms look to fund expansion, they are also looking for minority capital to prepare for smooth leadership transitions. Furthermore, investors evaluating deals often want to see solid succession plans in place before making a commitment.

As well as having experience in succession planning, we understand that the links between the best-performing managers and the firms that prioritise diversity and inclusion are strengthening. If people see that firms have diverse workplaces and inclusive cultures, they will want to join them, and we believe these factors will become fundamental differentiators that determine a firm’s long-term fundraising potential.

In 2023, the market faced the stiffest headwinds in more than a decade. Investors are taking a conservative approach to valuations, fundraising timelines are growing longer, an increase in failed auctions is limiting exit options, and lending terms are growing tighter. The 2024 Private Equity Trends Report shares valuable insight into the challenges GPs have experienced and their expectations for the coming years.