The ABCs of Fund Finance: Credit Facilities for Secondaries Funds and Funds of Funds

April 27, 2017

Private equity funds raised the second-highest level of capital for investments in secondary private equity interests in 2016. According to Preqin, 19 funds secured $23 billion in investor capital. This level was surpassed only in 2014, when 27 secondaries funds raised $26 billion. Sponsors, having raised record amounts of equity capital, are increasingly entering into credit facilities secured by secondary limited partnership (LP) interests. In addition to amplifying returns on the secondaries portfolio, these facilities can provide sponsors with a limited degree of liquidity and the ability to monetize a portion of the portfolio. While hedge funds of funds have not experienced similar equity raises in recent years, hedge fund managers continue to use leverage secured by underlying hedge fund LP interests to boost returns, and to assist with investor subscription and redemption cash management issues.

This OnPoint provides a brief overview of key structural considerations lenders and borrowers encounter when negotiating credit facilities secured by LP interests.

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