Fund finance is no longer ‘nice-to-have’ – survey

The use of credit facilities in the alternatives arena has ballooned in recent years, and new research suggests it’s expected to continue to grow.

A poll of private equity, hedge funds and real estate investors conducted by Intertrust found that 68 percent say demand for fund finance will increase over the next five years.

“The capital call world is obviously directly linked to the amount of new funds that are raised each year,” said Tom Glover, the new head of Investec’s fund finance team in New York. “There has been continued growth in fundraising over the last decade and this world has been a beneficiary because of that. I expect there to be a continued growth in fundraising. PE firms are using capital call facilities more intensively than they used to and that has led to a larger market size.”

What’s more, as the popularity of fund finance grows, these facilities are morphing from a nice-to-have to a must-have. Of those respondents who currently use fund finance, 71 percent said it’s vital to remain competitive.

“If you can have access to funds the same day or in two days you are much more competitive in your ability to move very quickly in the market,” Cliff Pearce, global head of capital markets at Intertrust, told pfm. “If you’ve got a capital call where it’s going to take two weeks or a month, you’re just not going to be competitive in a fast-moving market and we see this more and more. The market has become more liquid, cash is moving faster.”

Some institutional investors have expressed displeasure with firms using subscription credit lines due to the potential for long-dated financing lines to distort a fund’s internal rate of return.

“If [a credit line] is for an investment, I think six months max is appropriate. If it’s a management fee, a year is fine,” Allen MacDonell of Teacher Retirement System of Texas said on a panel at the IPEM conference in Cannes in January.