In October, Fund Finance Partners published a comprehensive primer on management company lines, or credit facilities extended to investment advisers and fund management companies (“ManCo Lines”). As FFP’s partners update this ManCo Line primer from our respective home offices, much has changed since October; ManCo lines being no exception.
What’s different about ManCo Lines, now?
ManCo Lines are tied to the fund manager’s contractual fee streams. Even during this pandemic-downturn, some of the most preeminent asset management firms are raising capital at record clips. If that’s not your firm, and fundraising forecasts have slowed, or asset value declines in your portfolios have led to diminishing contractual fee streams, your ManCo line availability may be constrained. Further, as depository institutions have generally pulled back either their willingness to extend credit or to lend to fund sponsors that are not existing relationships, demand for ManCo Lines is increasingly being met by alternative lenders.
What’s the strategy, here?
The raison d’être of ManCo Lines has not changed since last year, but the strategic landscape for your asset management firm undeniably has.
Working Capital Resilience: Deferred fee payments, carry clawbacks and lower management fees all have an impact on management company budgets. As with your portfolio companies and properties, these factors stress your working capital. If a temporary waiver or deferral of fee income is prudent from an investor relations standpoint, a proper ManCo Line can replace that missing cash flow.
Sponsor Support for Funds: When agreeing to your last fund’s GP commitment, accrued carried interest or incentive fees may have been a factor in management’s commitment. Although distinct from GP commitment financing facilities, ManCo Lines are a useful source of liquidity to support such commitment, or even to support your management company’s guarantee of existing GP financing.
In addition to capitalizing or supporting a GP’s capital commitment, in recent weeks we have seen management company affiliates even provide protective financing to investment vehicles. There are obviously conflicts and affiliate transaction issues that must be considered and resolved prior to any such infusion. As FFP has advised, these are surmountable, and with an optimized ManCo Line, the liquidity for such an investment becomes the simple part.
Strategic Alternatives: Although more apparent among business development companies, unprecedented declines in asset performance, or unaddressed credit facility covenant breaches are beginning to prompt fund sponsors to seek strategic alternatives (i.e., buyers or merger partners) for distressed or underperforming funds. Many of these changes of control occur (in addition to adequate value for the selling fund’s investors) incident to a payment by the acquiring fund’s management company to that of the selling fund. Like some of the trades that ensued during the financial crisis, FFP has advised acquisitive asset managers in connection with their utilization of ManCo Lines for strategic acquisitions.
Economic and financial crises, though costly, are seminal events for asset managers. Many of today’s leading industry leaders were relatively unknown prior to the financial crisis. Whether through innovation, relative value exploitation, conviction (or course correction) in their strategies or sheer luck, that crisis defined the industry’s next ten years. The opportunities and decision points we face today will do the same for the 2020s.