Private credit investors seeking attractive and consistent returns may consider private credit funds that focus on lending directly to private equity companies rather than the underlying portfolio companies. Investing in such funds allows us to finance the growth of private equity companies through non-perpetual, self-liquidating credit products, resulting in low volatility and predictable cash flow profiles. Masu. The total enterprise value of private equity managers is estimated to be well over $500 billion, providing an accessible and deep market for specialty financial providers in this field.
Greg Hardiman, Partner at 17Capital, highlights the benefits of this approach: One of the core areas is providing financing to PE firms themselves, whether to their management company or group of senior partners, commonly referred to as “management company financing” or “GP financing.” These business owners are looking for flexible, non-dilutive capital to build and expand their franchises or transfer ownership to the next generation. ”
PE firms generate cash flow from GP commitments (i.e., commitments to their own funds with limited partners), management fees, and retained interest. All or some of these cash flow streams can be used to service bespoke loan structures created by companies like 17Capital.
Examples of utilization of management company financing
Management financing allows PE firms to create investment capacity to tackle key growth initiatives across their businesses. “We primarily provide non-dilutive, non-permanent financing to PE firms to enhance reinvestment into their funds and expand their overall platform,” Hardiman says. “In doing so, the general partner can gain greater ‘skin in the game’ and further strengthen collaboration with the fund’s limited partners, increasing the manager’s profit potential.”
Mr Hardiman said: “As PE has matured, it has become more capital-intensive to run a successful company. Managers are raising more capital, putting more of their own money into the , which is more than 5% of total funding, compared to 2% to 3% in the past.” Hardiman also said that the slowdown in realizations in recent years has created a liquidity gap that is difficult for PE firms to manage. It also notes that lending to companies has become an attractive option to maintain a consistent pace of new business.
Management company financing is also commonly used when PE managers seek to address ownership transition objectives, including long-term succession planning. The motivation for such financing is often to enable the next generation to purchase significant ownership from the company’s original founders, to buy back some of the company’s stock from reluctant outside shareholders, or to Simply a desire to provide fluidity to the company’s current leadership. without compromising the fundamental economics of next-generation business.
Utilizing flexible financing solutions rather than selling stock allows PE firms to meet their capital needs while retaining long-term value within the company, but managers of a certain size may We often use multiple capital structure tools. “Everything we do is impermanent and will self-liquidate,” Hardiman says. “Management company financing does not dilute ownership and can be repeated and modified as the company’s needs change.”
Opportunities for private credit investors
Private credit companies like 17Capital raise capital from their own investors, who benefit from the stable, low-volatility returns provided by management company loans. Hardiman notes that investors who commit to these funds typically see returns comparable to traditional mezzanine or opportunistic credit.
The quality of the borrower, the diversification of the portfolio and the structure used are all important factors for providers of management company loans. “We focus on partnering with highly institutionalized PE franchises that manage high-performing funds with mature, profitable portfolio companies,” Hardiman explains.
Diversification across sectors, vintages and assets is important to manage overall risk. Management company financings often benefit from a given PE firm’s exposure to multiple underlying assets, supporting resilience across business cycles.
Loan seniority is a central feature because the lender’s accrued interest and principal are repaid first as liquidity is generated through the various cash flow streams that support the loan.
Hardiman gives a hypothetical example.
A private equity manager is seeking $250 million in funding from a management company for strategic growth initiatives. In this example, to acquire a credit manager. The $250 million financing will be provided by a specialist finance provider that will receive seniority on cash flows from existing fund commitments from the manager’s balance sheet, with a total NAV of $500 million.
When liquidity is generated from the underlying assets and distributed to all investors, the portion attributable to the manager’s balance sheet commitments is first utilized to repay the financing, and once the financing is repaid, the remaining proceeds will be distributed to managers. The Manager’s underlying funds and their respective external limited partners will not be affected, and the Manager will retain full flexibility to manage the income and operating expenses of its own business.
conclusion
The management company financing proposition is attractive to private credit investors as a result of its senior position relative to cash flow, conservative attachment points and high levels of underlying diversification. These tools provide PE firms with an attractive source of non-dilutive capital to fund their continued growth and ownership transition needs. Crucially, management company financing strengthens the collaboration between PE firms and their own investors, supporting a win-win outcome for all stakeholders.
