March 2020
March 11, 2020 – Since FFP’s inception in 2019, the vast majority of our fund sponsor clients’ mandates stem from our collective expertise in and around the fund finance markets. Between the number of fund finance transactions our principals have executed and our long-standing, deep relationships with virtually every bank and alternative lender in the space, our clients recognize the unique value we offer.
In addition to those (expected) value propositions, discussions with fund sponsors have made us aware of other supplemental or (surprisingly) even primary reasons for mandating FFP:
- Conflicts Clearinghouse: Large, multi-strategy sponsors with multiple investment vehicles are accustomed to evaluating whether to enter into affiliated transactions (i.e., joint transactions involving affiliate funds). For instance, a sponsor may manage a private credit fund that provides a participant loan to a private equity fund that it also manages. The private credit and private equity vehicles have distinct, sophisticated investor bases that have received extensive disclosures of the potential conflict. Perhaps the respective investors have also consented to the joint transaction with the other fund. Even in this example, most sponsors want to take every precaution to ensure that each fund transacts on market, arm’s-length terms and consistent with its fiduciary duties and the SEC’s regulations. Fund sponsors may engage FFP as a third party advisor in the joint transaction. Given FFP’s (i) neutral, unaffiliated role in the transaction and its (ii) singular awareness of market terms for transactions such as these – including FFP’s ability to obtain legitimate, third-party bids validating the sponsor’s terms, the sponsor is assured of being able to authoritatively support its transaction in the event of potential inquiries into the transaction’s structure.
- Mitigating Conflicts: In addition to the multi-strategy manager example, above, a mature private equity fund with an investment in a company needing follow-on investment capital in excess of such fund’s uncalled capital presents a different challenge. The sponsor may manage a newer private equity fund, with ample uncalled capital, with an investment strategy identical to the legacy fund. As in the previous case, the investors in each of the vehicles are sophisticated and have consented to the sponsor’s conflicts provisions in the respective fund governing documents. By engaging FFP in considering the range of capital solutions (whether allowing the newer fund to make a co-investment alongside of the legacy fund, in the same company, or procuring a tactical, NAV-based credit facility for the legacy fund’s financing of follow-on investments, so as to avoid a joint transaction among affiliate funds), the fund sponsor can attest to having truly evaluated all options. FFP’s (i) neutral, unaffiliated role in the transaction (ii) in depth experience in resolving complicated conflicts of interest among funds and investors, and (iii) unique ability to obtain the most attractive terms available to the market, the sponsor is assured of being able to respond to any and all questions regarding potential conflicts in the transaction’s structure.
- Fiduciary Duties: As all sponsors know and understand, they owe a fiduciary duty to their limited partners to achieve the best terms, including but not limited to the best price point for any financing. This is particularly pertinent when it comes to subscription financing, given it is the investor’s unfunded commitments that are the collateral. This is often reinforced by more and more frequent requests by limited partners to review subscription facility terms to verify that the terms are indeed the best that could have been achieved. An additional basis for fund sponsors’ mandating FFP has been our experience, market knowledge and our unique, un-biased, competitive process. The result has consistently been financing terms that are virtually unassailable to any limited partner inquiry.
- Ethical Considerations: Not all conflicts of interest contemplated by fund sponsors are limited to investors or funds. Sometimes, a fund sponsor will have to confront a possible, or perceived, conflict of interest between funds and the general partner or fund sponsor, itself. One such potential conflict arises when a fund sponsor is procuring fund-level leverage (whether a subscription line or other type of financing) and leverage in respect of the general partner’s capital commitment to the fund. While investors obviously support general partner alignment through “skin in the game”, and leveraging GP commitments has become the norm, rather than the exception, fund sponsors are rightfully cautious when a lender proposes to provide both financings. It is reasonable for limited partners to inquire into the fairness of the general partner’s leverage terms, in light of the same lender’s financing of capital calls. When FFP oversees a fund sponsor’s comprehensive leverage strategy, limited partners are assured of the fairness of the financing terms, for both the general partner and the fund, by demonstrating the thorough, competitive process and transparency of the range of financing proposals obtained.
In addition to fund sponsor community’s recognition of FFP’s unparalleled market reach and knowledge, FFP’s usefulness in identifying, mitigating and resolving potential conflicts of interest and support for fiduciary duties to investors have been called upon by fund sponsors who have trusted FFP to advise on their leverage strategies. Both general partners and limited partners can rest assured that their overall financing goals are being optimized cost-effectively and ethically.