BC Partners Credit on flexibility in fund finance

In May, BC Partners took on fund finance vet Tom Glover as an operating adviser in its credit unit; part of the firm’s expansion into GP and NAV-based finance. Glover, who had previously headed up the North America fund finance practice for Investec, was a shoo-in for BC Partners, Ted Goldthorpe, partner and head of credit at BC Partners Credit, told Private Funds CFO. “When he left [Investec], it became a very natural thing for him to just team up with us,” Goldthorpe said in May. “We’ve been working together for the last several months.”

We interviewed Glover and Goldthorpe to find out more about the platform and how it differentiates itself in the market, including why they say they have unique flexibility in the market, and where they see the most opportunity. Below is a condensed and edited version of the full interview.

How long has the firm been doing NAV lending?

Ted: We’ve been doing NAV lending for quite a while, but we didn’t have a dedicated effort for it. We’ve done many transactions in the space, particularly over the last two years. When we looked at our track record and the risk/reward of the market, we thought this is one of the most exciting spaces to be in right now. It’s probably the best risk/reward of everything we look at in our whole business. So, when Tom became available, which we weren’t expecting, it was a very natural thing for us to team up and create a true, dedicated effort for NAV lending.

What makes your platform different from others, in your view?

Ted: Our platform has very flexible capital. That’s really important in the fund finance space because there’s significant customization that has to happen. No two deals are created equally, and there is no standardized term sheet for each deal. Every deal is different, and from our perspective, the key is having capital flexibility. All of our capital is in a locked-up fund or is permanent capital, which allows us to be very flexible in deals. In addition, there are a lot of companies looking for this kind of capital and not many firms that are supplying it, which allows us to provide more innovative solutions and gain market share quickly.

Tom: We also don’t strictly focus on private equity. We evaluate opportunities across the private alternatives universe, whether in private equity, growth equity, venture capital, real estate, credit or infrastructure.

Ted: We’re really big on building franchise businesses. We have over 20 investment professionals on our team, which means you’re getting access to an army of underwriters. Since we are in the sponsor finance business, we can tell our borrowers that not only can we finance your portfolio deal with a one-off loan, but we can also give you a bundle deal for your GP. That’s when the sponsors get really excited.

Tom: Strategic, non-dilutive GP financing is a key component of our sponsor finance strategy. What we’re seeing is that fund managers are becoming increasingly sophisticated users of GP capital, whether it’s preferred equity or debt. They’re showing an increased interest in non-dilutive solutions to some of their financing issues. We have great respect for GP stakes firms. As part of their strategy of buying minority stakes in fund managers, they bring an array of skill sets to a fund manager to help them accelerate their business. These staking firms have found much success in delivering value to the LPs of their GP stakes funds and to the fund managers within their portfolios. We see our capital as both a complement and an alternative to selling a minority stake.

Within fund managers, multiple pools of value exist that can make them attractive credits.  Their businesses can often support a sizeable, non-dilutive preferred equity or debt financing. It is often a revelation to fund managers that patient, long-duration, non-participating capital is available to their businesses. When they make this discovery, it often really resonates. We help them look at their business in new ways and unlock capital.

Was there a dearth of GP financing before BC Partners entered the market?

Tom: There has always been a moderate amount of credit available to GPs from private banks to finance GP commitment needs, but non-dilutive capital on a more strategic scale really hasn’t been available until recently. I think that’s in part because the components of value within a fund manager’s business are not well-understood within the broader credit markets and can be rather complex to analyze. It’s still a bit of an art form.

Could you give us some examples of what clients are looking to do with GP financing?

Tom: Sure. We are working closely with a venture capital firm that is growing by leaps and bounds. They are experiencing many of the classic capital challenges that go hand-in-hand with this kind of success. As the GP, they need to have “skin in the game” and that happens by investing capital alongside the LPs in their funds. This kind of investment is known as the GP commitment. Our client is raising ever-larger funds, increasing the size of the GP commitment they make to each fund, deploying the capital faster and thus compressing the time between fundraisings.

So, their first challenge is funding this ever-growing wall of forward GP commitments within their current strategy. Their second and third financing challenges are arising from their successful efforts to further diversify their flagship business into adjacent investment strategies. They find themselves writing larger and more frequent checks to fund these new lines of business, both hiring new investment teams and covering their GP commit for the funds they are raising in these new areas. Finally, their fourth challenge is funding the buyout of a retiring senior partner.

All these challenges add up to a very substantial need for friendly, longer-duration capital that simply wasn’t very available until recently except via the sale of a dilutive minority stake. Our client’s search initially led them to the GP Stakes solution, but they kept coming back to the possibility that their needs could be met with other less-dilutive forms of capital. That’s where we fit in. We worked increasingly close with this client through their nearly nine-month journey. We have helped them evaluate the size and nature of their needs and think through their funding alternatives. They are now very close to deciding their path.

Going back to your flexibility, what are your return targets?

Tom: We bring an unmatched breadth of capital that spans the risk/return continuum from mid-single-digit returns to the upper teens. Our capital is also long in duration. It comes from our long-dated funds as well as our permanent capital vehicles. Having that range of capital at our disposal is a major benefit.