Presenting a live 90-minute webinar with interactive Q&A Secondary Credit Facilities for Private Equity and Hedge Funds: Financing LP Interests for Better Returns, Liquidity Negotiating Eligible Investments, Advance Rates, Borrower Base and Financial Covenants; Alternative Deal Structures TUESDAY, AUGUST 8, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michael D. Belsley, Partner , Kirkland & Ellis , Chicago Leon Stephenson, Partner , European Head of Funds Finance, Reed Smith , London The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Strafford Continuing Education Webinars Secondary Credit Facilities for Private Equity and Hedge Funds Webinar Leon Stephenson Michael Belsley 8 August 2017
Introduction • Secondary Funds post global financial crisis v today • Diversification across different PE funds and therefore different asset classes • Acquisitions of portfolio of equity interests on the rise • Development of the funds finance market generally and variation in products available • New lenders entering the market with greater range of finance products 6
1. Why would a secondary fund or fund of funds wish to borrow against their assets and why would this financing be of interest to lenders? • Bolster IRR / drive returns • Effectively “stretch” capital commitments available to invest at borrower level • Borrower may want acquisition financing • Borrower may want to have dividend recaps/return of capital to investors • Lenders usually have diversified pool of relatively liquid assets • Lenders have better returns than capital call/subscription line facilities • Attractive financing rates • Greater investor (LP) acceptance of use of leverage 7
2. What are typical structure terms of a secondary financing? • Term Facility/Revolver • Advance Rate/Tenor • Amortization/Cash Sweep Features • Transaction Size • Diversification • Covenants against value of portfolio investments • Eligible Investments, veto right or not? • Information rights on underling portfolio investments • “Keep Whole” covenants with respect to meeting economic obligations to underlying funds • Undertaking and representation on no transfer restrictions on granting and enforcement of security and sale to third party • Security / Collateral Package 8
3. What would be typical Financial Covenants for a secondary credit facility? • Loan to Value. May depend on diversification of interests and amortisation of the facility • Leverage covenants • NAV Concentration • NAV minimum amount • If Hybrid, additional tests around undrawn capital commitments as against total financial indebtedness 9
4. What provisions in relation to Collateral Accounts would be typical? • Blocked or unblocked • Waiver of rights of account bank over the account • All accounts or only specified accounts into which certain distributions flow • Accounts into which the proceeds of undrawn capital commitments are paid • Nostro accounts and account banks with depositaries or correspondent banks 10
5. What information rights would lenders normally require? • Quarterly and annual reports and financial statements of the secondary fund • Quarterly reports on underlying portfolio investments that secondary fund receives to be passed on • Other material information received by the secondary fund in relation to the portfolio investments • Notification of insolvency or other issues at the portfolio investment level • If a hybrid transaction additional information on investors in the secondary fund 11
6. What is the typical collateral structure? Has this evolved over time? How do Lenders prefer to see them structured? • Take direct security over the assets • Indirect lien through subsidiary or SPV of the secondary fund (no other debt at that level then) • Economic interest security as an alternative? • Distributions / Bank account security • Hybrid facilities will also have recourse to investor commitments in the secondary fund 12
7. What sort of legal due diligence should be carried out? • Secondary fund/SPV level diligence to ensure financing can go ahead and security can be granted • Portfolio Investment level diligence to ensure identification of transfer restrictions, obligations of limited partners to fund capital, life of the underlying funds etc. 13
8. What are Key risk elements relating to a Secondary facility? • Getting full consents from the underlying GPs to both pledge of assets and sharing of information • If all LP interests are moved into an SPV and bank just has security over the rights in the SPV, bank needs to enforce over all of the portfolio investments at the same time • Issues around the bank being tainted with fiduciary duties of the GP of the SPV or secondary fund depending on which type of security is taken • Interaction and potential conflicts with existing subscription-based lending facilities of the borrower 14
9. What are the issues relating to valuation? Who values the LP investments and how often? • Could be the borrower who just provides valuations of the underlying portfolio investments based on quarterly reports provided by underlying GPs • Could be valuation agent 15
10. Do we see other types of end users (other than secondary funds) becoming potential borrowers? • Family offices • University endowments • Sovereign wealth funds • Differences in approach between these entities and secondary funds 16
The Year Ahead • Brexit and the impact on secondary funds financing and fund financing generally • Search for yield for investors • Gradual acceptance by underlying fund counsel of the growth of these facilities, and moving towards standardisation of consents • Important growth of Hybrid facilities as lenders become more comfortable with different recourse for their financings • New entrants into the market and the ability to carry out due diligence 17
Thank You Michael D. Belsley Kirkland & Ellis michael.belsley@kirkland.com Leon Stephenson Reed Smith lstephenson@reedsmith.com 18
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