Investment Idea
Okay I need input to see if this has merit. I work at a credit fund and we came up with this investment thesis today, but need to test it.
There are a variety of PE/PC professionals out there that need to make GP commitments but don't have the ongoing cash to do it.
What if we provided 50% of the original cost basis of your commitment as a loan which you then use to finance your new commitment? This would be structured as preferred equity without a maturity date and we would simply receive an ongoing pref rate (no cash pay), preference over all cashflows, and a minimum return of 1.3x. cost of capital would be mid teens, but once again, no cash pay requirement.
Who are my competitors? Keep on my mind my collateral isn't your carry, it's the commitment you made to your fund.
Based on the most helpful WSO content, here are some insights to consider for your investment thesis:
Key Considerations:
Market Need:
Investment Structure:
Cost of Capital:
Competitors:
Traditional Banks:
Specialized Lenders:
Internal Fund Solutions:
Competitive Landscape:
Competitive Advantages:
Risks and Mitigation:
Investment Thesis Validation:
Questions to Consider:
Framework:
Conclusion:
Your investment thesis appears to have merit, especially given the unique structure and the lack of cash pay requirements. However, thorough due diligence and competitive analysis are crucial to ensure the viability and attractiveness of this offering in the market.
Sources: PE professional, what's your process while judging an investment?, PE professional, what's your process while judging an investment?, Q&A: Private Equity Fund of funds - GP Evaluation/ Due diligence, Reflections from year 4 as an equity analyst, Q&A: PE Secondaries Principal
Is the idea to provide pref instead of a debt RCF that most funds offer? I'm not sure how other banks work but the w/r/t the bank my firm uses the line of credit is personally guaranteed by me (i.e. it's not just secured against my investment). I think this would be compelling but would you really want to offer this to all investments in a fund unilaterally? Seems like a poor risk-reward for you.
Non recourse. Collateral would be you need an existing fund commitment and we take a pref on that and the new commitment. Cost of capital is 15-18% all PIK but structured as pref equity
You taking this out via pref just contributes to the liquidity decay no? Doesn't this open you up to some massive FCF issues from a fund perspective on the downside?
Is this not what private bankers do to some degree?
Pretty sure Blue Owl did this for I Squared when the founders who essentially controlled the entire fund expanded the ownership out to the rest of the partners and did it in the form of a loan of sorts... like pretty much giving the previously not-staked-in partners equity in the form of loan, but I think the partners were the ones bounded into it. Feel free to correct me if I'm wrong, anyone who is more familiar with this.
Mid teens cost of capital when most funds are probably run rating that on an unlevered basis is going to be hard. The funds that do have stellar performance arelikely going to have agreements with private banks to offer lending on much more attractive terms so you’ll end up loaning to mid market funds where you need to take a bet on performance. If most ppl think 2 x Moic over 5 years is the bogey then I think they wouldn’t be better off with a mid teens cost of capital pref
Interesting idea tho
Also the pref coupon not tax deductible so that will be working against u
It's not a coupon, it's an implied rate that shouldn't be taxable like PIK interest
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