Equity Bridge Financing solution helps improve IRR
CACEIS offers private equity fund managers bridge financing solutions that allow them to delay the process of collecting capital commitments from investors, thereby enhancing the internal rate of return of the fund.
In such an arrangement, CACEIS provides Equity Bridge Financing to the manager – essentially a guaranteed line of credit – whereby the financing arrangement is agreed not on the asset but on the uncalled capital commitment from high quality investors.
"In other words, it is financing on the liability side of the fund rather than the asset side of the fund," comments Nicolas Palate, Head of Private Equity and Real Estate Relationship Management, CACEIS. "This can be ideal for small, recurrent payments that the manager faces, such as invoices or investments requiring frequent cash flow i.e. private equity fund-of-funds."
By using a bridge facility to finance all of the fund's activity before calling its investors to repay the loan, this limits the number of investor drawdowns and makes them predictable. As Palate points out, in a typical private equity fund arrangement, LPs could be called at any time within 10 days, requiring them to have the requisite cash on hand.
"There are two main advantages to this type of financing," continues Palate. "The first advantage is that it allows the fund manager to better predict the future cash flow of the fund and to be able to say to investors that they will not be called in Year 1, but at the end of Year 2, for example; even if the manager has already started to make investments.
"Secondly, it allows the manager to optimise the fund's IRR. In the current context of low interest rates, it is cheap to borrow money from CACEIS.
With a classic financing process, an investment over five years with a multiple of 1.5 will have its IRR calculated on a period of five years. With the EBF facility financing the first year, however, the IRR would instead be calculated on four years, increasing the IRR as a result.
Financing is provided to the client via confirmed credit lines, which may be denominated in euros or other currencies. The arrangement of the financing is managed by the Private Equity, Real Estate Securitisation (PERES) group within CACEIS.
To avail of a bridge financing solution, a private equity manager would ask CACEIS to perform a credit analysis on the end investors. Assuming they have a good rating (and balance sheet), CACEIS will lend money to the fund based on the guarantee offered by those investors.
"We only offer this service to high quality funds with high quality institutional investors. As investors are committed to pay the GP when it invests – albeit at a delayed time – we get paid when investors face this capital call," confirms Palate.
Bridge financing is not new. It has been used by Credit Agricole Corporate & Investment Bank for more than a decade but what is new is that the asset servicing arm of the bank – CACEIS – is now also offering this service.
"We can offer our clients full distribution including depositary and financing solutions. We have all the information on the fund needed to provide equity bridge financing. It is better for the fund to have a single point of contact for the depositary and financing instead of using one bank for the depositary service, one bank for financing and so on.
"We want to position ourselves as the sole banking partner of our clients. We want to be able to offer a full one-stop-shop solution – depositary, accounting services, administration services and financing services," explains Palate.
The Private Equity and Real Estate Securitisation division has benefitted greatly from the creation of Credit Agricole's "Large Client Division" which brings together three groups: the investment bank, Credit Agricole CIB referred to above, the depositary bank CACEIS and Indosuez Wealth Management (formerly Credit Agricole Private Bank) the private banking arm of the group. The ability to draw upon three distinct groups is quite unique in the industry.
"As part of the Credit Agricole group, the investment bank is able to assist CACEIS in putting together the loans and offer a top-of-the-line service to clients," says Palate. "Ours is a cross-entity private equity business line, which has proven very effective. It allows us to provide significant financing to our clients with the backing of the group's investment and private banks."
Palate confirms that, "We have done approximately 10 equity bridge financing deals over the last 12 months and each of these has been significant in terms of size. We can also offer clients smaller amounts of credit with shorter maturities if needed."
To remain in compliance with AIFMD, and to avoid the appearance of using leverage in the fund, each tranche of the total loan arrangement – which might typically have a maturity of three to five years – cannot be longer than one year. Clients would therefore draw down capital for 364 days, and then reinitiate the finance arrangement accordingly in Year 2.
On the AIFMD point, Palate explains: "Due to the rules of AIFMD, we cannot lend money for more than one year, otherwise the fund will be considered as leveraged. This would then mean additional reporting and regulatory constraints faced by the manager. So we sign maturity agreements of three to five years and using this framework clients draw down capital each year."
CACEIS will do all the necessary due diligence to check the creditworthiness of a fund's investors. This is all done in-house. The same people in charge of the depositary service to the fund manager will be in charge of the financing arrangement.
"Acting as the depositary, we are aware of everything happening in the fund. That gives us a lot of comfort in providing the bridge financing because we can see everything in the fund at the investor level and the individual asset level. The goal is to add value to our depositary service," concludes Palate