Investec’s fund finance survey – four takeaways

Dividend recaps and back-levered preferred equity are among the trends to emerge in the past year, according to a survey obtained exclusively by Secondaries Investor.

Investec has completed its third annual Fund Finance Secondaries Survey, sections of which have been seen by Secondaries Investor. Here are some of the most interesting findings.

Rise in asset-backed financing 

The proportion of respondents that use some kind of financing facility rose to 86 percent from 75 percent compared with the prior year’s report. Subscription lines are still the most popular form of leverage and borrowers are becoming more adventurous. Of those that used leverage, 63 percent employed asset-backed financing, against 35 percent the previous year.

According to Ian Wiese, a director of origination with Investec, the increased uptake is partly due to greater competition for assets putting pressure on returns and an increasingly competitive financing market driving down costs for borrowers.

Dividend recaps are here

Fully 13 percent of respondents that used asset-backed financing in the past year used it to carry out a dividend recap, the survey found.

These transactions, in which a firm borrows in order to make a one-off payment to its LPs, tend to be “modest” in terms of loan-to-value and are normally – though not always – secured against highly diversified portfolios, Wiese said.

It is difficult to say how this figure compares with last year’s survey as a different question was asked. Anecdotally, Wiese said he has seen an uptick in recent months.

“[A GP] may be looking at raising its next fund and LPs would find getting some liquidity back attractive. It may encourage them to reinvest into the new fund. Tied to that is, if you can increase your DPI going into fundraising mode, it just puts you on the right trajectory.”

The emergence of leveraged pref

Some secondaries funds are using leverage in their own preferred equity deals. Instead of extending preferred equity to a GP using fund capital, secondaries firms can borrow a portion of some of the capital from a bank, creating a tranche within the preferred equity issuance with a lower blended cost of capital. This makes it a cheaper option for GPs taking on the pref and can help boost the return to the secondaries fund – provided the portfolio performs as well as hoped.

The bank is paid in the form of preferential cashflows, perhaps triggered by the exit of specific assets that it believes are winners, Wiese said. Fully 8 percent of respondents have done a deal similar to this, the survey found.

Debt intermediation is on the rise

There has been an increase in the number of lenders offering subscription lines and asset-backed financing over the past few years. At the same time, around “half a dozen” intermediaries have entered the market with the aim of driving the best possible financing terms for private equity clients, further skewing the market in favour of the borrower, Wiese said, citing Deloitte and Marlborough Partners as examples.