Three years ago, CACEIS took an innovative step forward by putting in place an efficient, comprehensive financing solution for private equity funds, in line with international standards: equity bridge financing (EBF). The solution is becoming increasingly popular, on the one hand because of the growing private equity market and, on the other, because it meets the needs of fund managers and end investors.
“This solution is based on a facility granted to funds to finance their cash needs until a call for funds”, explains Gilles Corcos, General Secretary of the Private Equity Real Estate and Securitisation business line at CACEIS.
Equity bridge financing provides funds with the certainty that they will have the necessary financial resources to fund investments and to cover their operating expenses without having to issue calls for funds within a very short timescale. The credit line is generally available for a period of 2-4 years, with the possibility of an extension, and may be drawn down in cash (traditional loan) or in the form of letters of credit (guarantees).
This financing solution makes it possible to stagger and reduce the number of calls for funds. Apart from the fact that the use of EBF helps to improve a fund’s IRR, such financing above all enables management companies to be reactive when negotiating investments and provides the fund’s investors with greater visibility regarding future calls for funds. EBF does not create leverage since it does not increase the fund’s investment capacity.
In addition, it is not a revolving facility, as it is not automatically topped up and a drawing under the facility cannot be repaid by means of another drawing.
“An analysis of the fund’s documents of incorporation and its compatibility with the way the EBF is structured is a prerequisite to arranging such financing. On top of that, we analyse the creditworthiness of the investors and look very closely at the conditions governing the realisation of collateral”, adds Gilles Corcos. Therefore, a security package is put in place which primarily involves the collateralisation of the subscription undertakings of investors in favour of the lenders. Although the fund’s assets are not in the scope of the collateral, they are nevertheless closely scrutinised when the financing is put in place.
Equity bridge financing is intended for all types of funds where institutional investors or similar make up the majority of shareholders, regardless of the investment strategy (private equity, infrastructure, real estate, etc.). Moreover, this financing is, of course, only granted to funds in which the capital is paid up gradually. It may be granted to all legal forms of funds established in different jurisdictions (FPCI, FPS, SLP in France, SCS, SCSp, SICAR and RAIF in Luxembourg, LP in the UK, Jersey and Guernsey, etc.).
According to CACEIS’s experience, given the time and cost involved in structuring EBF, this type of facility is geared towards funds having a minimum size of €200 million. The amount of the financing, which is adjusted to match the needs inherent in the investment cycle of funds, generally represents an amount equal to 20–30% of the fund’s size.
While this type of financing has been readily available on the market for several years in the United States and the United Kingdom, management companies in continental Europe have only started to use this product over the last three to four years. They have nevertheless integrated it rapidly, as it has become clear that it is a competitiveness issue for French and European asset managers and is being increasingly taken into account by investors.
This financing solution is an ideal fit for the private equity services of CACEIS. Its traditional role as depositary and fund administrator enhances the quality and fluidity of the relationship with the fund being granted financing, and avoids the need for the latter to disclose to third parties the very confidential list of its investors. Such information is already known to CACEIS in its role as depositary.
Similarly, its expertise significantly boosts its capacity to structure the financing, regardless of how the fund has been set up, and at any time during its life (at the time of its launch or subsequently). CACEIS has successfully demonstrated its ability to deliver and offer structuring solutions tailored to the different types of structures adopted by asset managers (several funds and/or SPVs established in different jurisdictions and bound by co-investment agreements combined within the same EBF).
CACEIS works in partnership with CACIB within the framework of Crédit Agricole’s Premium Clients division, thereby increasing its financing capacity and enabling it to offer a single loan agreement, managed by the same team but based on two balance sheets. This joint expertise is a major asset in meeting growing market needs.
CACEIS and CACIB are therefore able to individually offer financing that can be as high as several hundred million euros, or participate in pooled facilities in amounts running into several billion euros. This financing is available for all regions where the private equity market is sufficiently developed and active, namely in France, Luxembourg, the United Kingdom and the United States. Outstanding financing granted by the two partners, jointly or individually, represents a substantial share of the market, in particular in France and Luxembourg.
More than 40 transactions have been concluded in less than three years. Lastly, equity bridge financing complements and is part of the wider range of support services offered by units of the Premium Clients Division to fund managers (asset servicing, asset/project financing, cash management, M&A, etc.).